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The 5 Safest Income Stocks For Uneasy Investors

8/31/2013

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This wonderful article appeared recently and if you have been reading my recommendations, you will see why I posted it here. My consistent message along with supporting posts say the same thing...invest in stable, blue chips with a steady growth rate and dividend yield. I've told you how to pick 'em. I've posted videos on how to price 'em. In order to build wealth in a low risk way, you must buy at the right price and reinvest those dividends.

By Amber Hestla &, Michael J. Carr

Investors define income stocks in different ways. We target those with dividend yields higher than the interest rate of the 10-year Treasury note, which is currently at about 2.7%.

Safety can also be defined in different ways. We tackled the definition from two perspectives: Both the company and the income it pays should be safe.

A dividend is safe, in our opinion, when it is likely to continue being paid at the same rate as it was paid in the past. To find stocks with safe dividends, we looked for companies that have paid investors in each of the past five years. The dividend payment also has to account for less than 50% of its earnings.

If a company passes these tests, they have demonstrated a commitment to providing shareholders with income and should be able to continue paying the dividend even if earnings decline. There is no guarantee they will, but the data says it is likely.

We also excluded American depositary receipts (ADRs) in our effort to find safe income. ADRs are issued to track the stocks of companies listed on foreign exchanges. The dividend policy of companies in foreign countries is often different than U.S.-listed companies. Rather than paying a steady quarterly dividend, many foreign companies make a payment once or twice a year in an amount that varies with earnings. There is nothing wrong with buying ADRs, but they will not necessarily provide regular and steady income.

To find safe companies, we limited our search to large-cap stocks. These companies are more likely to withstand an economic slowdown than small-cap stocks.

Finally, we excluded companies with dividend yields greater than 7%, because unusually high dividends are often a sign of problems.

The top five companies on our list are:

-- ConocoPhillips (NYSE: COP), 4.1% dividend yield

-- Cracker Barrel Old Country Store (Nasdaq: CBRL), 3% dividend yield

-- DuPont (NYSE: DD), 3.1% dividend yield

-- Gannett (NYSE: GCI), 3.3% dividend yield

-- Lockheed Martin (NYSE: LMT), 3.8% dividend yield

These stocks are all buys at their current prices, but we could also wait for a pullback and earn a higher yield. Selling put options could allow us to get paid while waiting for a pullback and increase our returns.

A put option gives the buyer the right to sell 100 shares of stock at a certain price, known as the exercise or strike price, at any time before the option expires. Put sellers agree to buy those shares if the put buyer chooses to sell.

When selling a put, you are paid a premium that provides immediate income. If the option expires worthless because the stock remains above the exercise price, you keep the premium as your gain on the trade. If the stock falls below the exercise price, you will be able to buy the stock at a reduced price.

The specific trades we like for each of those five stocks are:

-- Sell COP Nov 60 Puts at 30 to 65 cents with shares trading near $66.40

-- Sell CBRL Dec 85 Puts at $1 to $1.60 with shares trading near $103.40

-- Sell DD Jan 48 Puts at 30 to 70 cents with shares trading near $57.85

-- Sell GCI Jan 20 Puts at 30 to 55 cents with shares trading near $25

-- Sell LMT Dec 100 Puts at 30 to 80 cents with shares trading near $125.50

For Conoco, for example, you could sell a put that expires in November at an exercise price of $60 for about 60 cents. Since each contract covers 100 shares of stock, you would immediately receive $60. COP is trading at about $66.40 a share. If it is trading below $60 when the option expires, you would get the stock at a 10% discount to its recent price, paying $59.40 a share ($60 strike price minus 60-cent premium collected for selling the option).

If COP is above $60 at expiration, you would keep the premium as your profit. Brokers generally require a 20% margin deposit when selling a put, which can be thought of as a down payment on the possible purchase price. In this example, the margin would be $1,200 (20% of $6,000), making the return on investment 5% if the option is not exercised.

Selling options is a great income strategy to increase your gains and allow you to buy stocks on price dips.

This article was originally published at ProfitableTrading.com
The Top 5 Income Stocks for Uneasy Investors



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How to Hedge Your Portfolio Against A Global Economic Crisis

8/28/2013

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Just last month my step-mother asked her broker at Morgan Stanley about buying Caterpillar. Thank God she took me with her to re-organize her portfolio. I said no way due to the global economic slowdown. That week 60 Minutes aired a report on China's over developed crisis. Talk about timing.

By Amber Lee Mason and Brian Hunt

Want to hedge your portfolio against a global economic crisis?   Supertrader Jim Chanos can help you...

Chanos is one of the world's best short-sellers. Most traders and investors attempt to profit from stocks rising in price. But "short sellers" attempt to profit from stocks falling in price. (Read this educational guide from our colleague Jeff Clark for the details.)  

Chanos and his team of forensic accountants blew the whistle on Enron – the big energy-trading firm that went bankrupt in 2001. He's also famous for predicting the big declines in telecom giant WorldCom, PC makers Dell and Hewlett-Packard, and state-owned oil giant Petrobras.  

Now, Chanos believes another company is poised to suffer a substantial fall. And shorting this stock happens to be an excellent hedge for folks worried about a big economic decline spurred by rising commodity prices from 2002 to 2008 and from 2009 to 2011, mining companies have plowed hundreds of billions of dollars into new projects.

Many of these projects are geared toward selling output to China, the world's workshop.   And Caterpillar (CAT), the world's largest maker of mining and construction equipment, has enjoyed this spending boom, selling more equipment than ever to mining companies... But now it's ending.   Chanos believes the Chinese economy is in the midst of a major slowdown. He says the government has encouraged too much investment in real estate and infrastructure.

As China's economy slows (or worse), it will consume less commodities... which will suppress mining investment... and damage Caterpillar's earnings.   Over the past year, Caterpillar has earned $6.77 per share. Chanos believes a continued slowdown in China and commodities could drag those earnings down to $5 per share or lower. He also notes that the company's profit margin is near historically high levels. He sees the margin "reverting to the mean" and falling back to a normal range... which will further suppress earnings.  

As you can see from the chart below, Caterpillar enjoyed a huge rally off the 2009 bottom. Shares climbed from $20 in early 2009 to $112 in 2012. Since then, shares have declined to $83.
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If the Chinese economy severely weakens over the next year or two, shares of Caterpillar could easily suffer a hit to the $50-$60 range. This would be a drop of 28%-40%.  

Some Growth Stock Wire readers are worried a global economic slowdown (or worse) is coming soon. In that scenario, Caterpillar will plummet and bets against it will pay off. So if you're bearish on the economy, you'll find this idea useful. More optimistic readers can simply consider a short position in Caterpillar as a way to hedge their long portfolios.  

We know some folks won't short stocks. Some see it as "un-American" to bet against U.S. companies. At the very least, it's a good idea to avoid buying Caterpillar. One of the world's best traders singled it out as very vulnerable. Chanos may be wrong on Caterpillar, but it's not a good idea to bet against him.
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How To Profit From 'The Death Of Cash

8/28/2013

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I covered the precursor to these technologies as well as some of the players in this market-space in my Special Report entitled the "Death of Cash". You're going to start hearing more and more about the capabilities of these different technologies as well as seeing how all of these things play out and impact the world in which we live.  Get on-board this great opportunity...YESTERDAY!

By Andy Obermueller


The Wall Street crowd is starting to get the picture.

On the cover of a recent issue of Fortune magazine: "The Death of Cash," there was an article examining an impending transition that I've been talking about for some time.

The magazine examined some large companies as the drivers in this new technological push, which hinges largely on the continued adoption of portable devices, like cellphones, that can be used much like a credit or debit card. Its winners are Google (Nasdaq: GOOG) because of its Google Wallet initiative, which I was among the first to cover; eBay's (Nasdaq: EBAY) PayPal; Visa (NYSE: V); MasterCard (NYSE: MA); Apple (Nasdaq: AAPL) and Facebook (Nasdaq: FB).

Those are great companies that will lead the trend. But while everyone else is looking at the obvious "winners," it will take some time for this macro trend to move the needle for companies as big as these.

Instead, I've got my eye on a small company that's at the forefront of this game-changing trend.

I first mentioned this game-changing technology in an article about another stock in this sector I like: payment processing firm Zebra (Nasdaq: ZBRA).

I like this concept for a lot of reasons. For one, I hate it when my credit card is taken out of my view. Two of my cards -- a debit card from my bank in Texas and my Capital One Visa -- were hacked recently, which meant both cards needed to be replaced. I didn't get stuck with any of the fraudulent charges, but replacing a card is still a hassle -- and securing the number on a special microchip would render fraud far more difficult.

It's also going to open up mobile payments to a whole new audience, notably among young people and a portion of the population that doesn't use banks. That's because not only is the credit card in Google Wallet available as a prepaid card -- no credit required -- it is also available on a prepaid smartphone through Virgin Mobile. This will certainly help push this technology into the mainstream.

And while I like Zebra as a way to profit from this technology, my research has led me to a stock I like even more.

As I said, it's not Google. Nor do I think it will be Sprint (NYSE: S), which runs the network, and it's not Citigroup (NYSE: C) or MasterCard, which administer the card Google Wallet uses.

Instead, the likely winner is a company most people have never heard of -- NXP Semiconductors (Nasdaq: NXPI). It makes the special chips that go in the phone that "talk" to cash registers. The technology is known as near-field communications (NFC), and NXP is the leader, with critical existing supplier relationships with all the major phone manufacturers, including Apple.

And mobile wallets are a booming business for NXP: It grew 19% in 2011, 41% in 2012 and is on track to grow 30% this year (to $1.26 billion), according to analysts at Merrill Lynch. These ID chips were just 16% of NXP's $4 billion revenue base in 2011, but should account for 35% of sales by 2015.

The real question for investors: Can NXP make money with its cutting-edge chips? After all, some chip makers offer boring products, and are content with gross profit margins of just 15% or 20%. "We'll make it up on volume," these chip makers say.

NXP doesn't need to offer up such excuses.

Thanks to a combined $5 billion in R&D spending over the past six years, this company's products are so advanced that NXP can charge top dollar for them. That strong pricing power fuels gross margins in excess of 45% and EBITDA margins of 30%.

And that's led to market-beating returns for investors so far.
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I expect results like this to continue as NXP grows revenue from the mobile wallet market -- especially with Google behind it. I think that alternative payment technologies are one of the hottest opportunities for aggressive growth investors right now. This is a rocket ship you need to book a ticket on.
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Forget Coca-Cola: Buy This Stock Instead

8/28/2013

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I would never discount investing in one of the world's most stable and best companies especially when it comes to dividend growth. I do have to admit
I was very impressed with this company that for now isn't a threat to the carbonated market-share but certainly down the line I do see it being
acquired by one of the big boys. I am hoping that will be the case so much
so that I took some long positions covered with equity. This is one of those limited and once in a lifetime opportunities where you can make no less
than 300 % on this stock. Take your positions and remember to hedge.

You don't have to own shares of Coca-Cola (NYSE: KO) to know that through its worldwide production and distribution network, the company owns some of the most valuable brands in the world. All told, Coca-Cola pours 3% of the beverages served to humanity each day.

And you don't have to work on Wall Street to know that shareholders have done pretty well in the past decade.

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Coke products aren't the most-consumed liquid overall, of course. Good old H2O accounts for the most amount of servings, then tea. But as far as soft drinks are concerned, Coke and Diet Coke are the No. 1 and No. 2 brands in the world.

A game-changer right in the midst of this "stodgy" industry...
This planet consumes 55 billion beverage servings a day. Globally, the research consultancy Datamonitor pegs the soft-drink market at an eye-popping $216 billion annually. Beverage Digest, a trade publication, puts the value of the U.S. soft drink market at fully $77.1 billion a year.

The beverage industry is extremely large, highly fragmented and intricately complex. Some brands are doing well. Others are -- forgive me -- flat, and a few are on the express train to Donesville. But the industry view from 30,000 feet isn't so hot. Beverage Digest, in its 2011 rankings, noted that carbonated soft-drink sales fell 1.2% in 2012. Soft drinks haven't seen an increase in U.S. sales since 2004, which seems to indicate people are cutting back for reasons other than the lackluster economy. Consumption, for now, is at 1996 levels.

So should investors steer clear of this industry? Not if you want to miss out on a game-changing company with virtually unlimited potential.

SodaStream (Nasdaq: SODA) is an Israeli company that makes a carbonation machine that makes custom-flavored sodas. The company has a razor/razor blade business model, given that it sells both the machines -- which cost anywhere from $99 to $129 -- as well as consumables like CO2 cartridges, flavoring and special carbonation bottles. The company's worldwide retail footprint comprises 60,000 stores in more than 40 countries, including mass-market chains in the United States.

The appeal of the product is multi-faceted...

We live in a do-it-yourself (D-I-Y) society. Consumers are learning how to do their own home repairs, create their own fashions, and grow their own food. And they're always on the lookout for more ways to stop buying someone else's product or service, and do it on their own.

Of course even the most brilliant concept can languish if management doesn't know how to crack a market. Sodastream's executives courted the most popular retailers to give its products visibility. Mission accomplished. Prominent Sodastream displays can be found in major retailers across the country.

Tapping into Bed, Bath & Beyond (Nasdaq: BBBY) and other U.S. retailers helped this once obscure company boost its sales to more than $400 million by 2012 from around $145 million in 2009. Considering that less than 2% of all U.S. households have a Sodastream beverage maker, this company's domestic growth prospects are open-ended. And management is now tapping into a range of promising international markets as well, setting the stage for more than $600 million in sales by 2014, and perhaps $1 billion a year later.

This isn't just a play on sugar-laden soft drinks that you can make at home. Many people simply make carbonated fruit juice or make plain old seltzer. The days of lugging home a heavy case of water bottles may soon be gone.

Of course, whenever you are looking at a young and fast-growing company, you have to wonder if management is too focused on sales growth and ignoring the bottom line. After all, profit-less growth is a Pyrrhic victory: you may win the sales battle, but will lose the profit war.

Notably, Sodastream's bottom-line performance may be even more impressive than its top-line gains. Per share profits rose an average 50% in 2011 and 2012, and should continue to grow at an average of 25% in 2013 and 2014 (to around $3.20) a share, according to consensus forecasts.

The strategy to grow is solid: Expand its retail footprint geographically across a variety of price points and functionally own the do-it-yourself soda market, then expand into office systems and food service.

That, to my mind's eye, is the money shot.

I've tried SodaStream products, and they're good, at least as good as the other stuff that is out there, but add booze into the mix and you might just have The Real Thing. Restaurants live and die on high-margin alcohol sales, and customized boozy sodas might be a nice way to augment the till behind the bar.

I like this product. I like that the company is profitable. I like its prospects for growth, and I like that it is riding a pair of trends -- wellness and the environment -- that I think have real legs as consumer movements. I also like that the company, valued at about $1.34 billion, has a lot of room to grow.

SodaStream is still growing, and it's not inconceivable that it'll experience some growing pains along the way. The stock can be a bit volatile sometimes, so it's important that you be able to stomach the day-to-day swings, keeping in mind that this company is capable of big things.

You may want to wait to buy this stock on any pullbacks, but I think shares are a good "buy" at their current level for aggressive growth investors.
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E-Commerce Gets A Latin Beat

8/27/2013

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Company To Watch,,,
PROFILED: MercadoLibre (NASDAQ: MELI)

As an investment destination, Latin America carries a lingering stigma. Many investors still view the region as undeveloped and riddled with civil strife, poverty, corruption, and violent crime—in short, too risky. In the financial media's coverage of emerging markets, Asia seems to dominate the headlines.

Many Latin countries undeniably struggle with a multitude of woes, but a preoccupation with the region's age-old afflictions misses the bigger and considerably more upbeat picture.

Latin America is home to a growing, increasingly educated and computer-literate middle class. And more and more of these Latin consumers are flexing their newfound purchasing power online.

The explosion of e-commerce activity in Latin America chiefly benefits one company: MercadoLibre (NASDAQ: MELI), the region's leading e-commerce player.

Often referred to as "the eBay of Latin America,” MercadoLibre functions in the same manner. Indeed, eBay (NASDAQ: EBAY) holds an 18 percent ownership stake in MercadoLibre.

Headquartered in Buenos Aires, Argentina, MercadoLibre (which means "free market” in Spanish) hosts automated web-based commerce platforms that allow businesses and individuals to list items and conduct sales and purchases online in an auction or fixed-price format. MercadoLibre's mode of operation is familiar to anyone who's used eBay or Amazon (NASDAQ: AMZN).

MercadoLibre also offers MercadoPago, an integrated payments mechanism similar to eBay's PayPal by which users send and receive payments online. In addition, the company's MercadoClics program allows businesses and individuals to promote their products and services through online display and text advertisements.

MercadoLibre now operates e-commerce platforms tailored towards Argentina, Brazil, Mexico, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Panama, Peru, Portugal, Uruguay, and Venezuela.

As the largest company of its kind in Latin America, MercadoLibre's dominance confers competitive advantages that elude even eBay and Amazon. As opposed to the more homogenous cultures of North America and Europe, the countries south of the border represent a rich and cacophonous variety of languages, currencies, customs, and regulations. It's a high barrier to entry over which MercadoLibre has already vaulted.

MercadoLibre is riding a powerful secular trend. QuartSoft, a web development company, reports that worldwide e-commerce sales will reach nearly $1.4 trillion by 2015 (see chart below).
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Source: QuartSoft. Chart used by permission. MercadoLibre's room for regional growth is substantial. According to a 2012 study conducted by América Economía Intelligence (AEI) and Visa (NYSE: V), e-commerce activity in Latin America soared by 42.8 percent between 2010 and 2011 to hit $43 billion in sales, nearly twice the $22 billion that was posted in 2009.

The study found that e-commerce in Latin America increased by an estimated 26 percent in 2012 and is on track to increase by 28 percent in 2013. Brazil accounts for the most e-commerce in Latin America, at an estimated 59 percent of sales last year.

Factors for e-commerce growth in Latin America include greater credit and debit card usage; the proliferation of social media and group shopping sites; enhanced online security that reinforces consumer confidence; and an expanding pool of "e-tailers” that reach customers through their websites.

Another catalyst is mobile commerce. As my colleague Chad Fraser explains in his August 22 article on Investing Daily, the trend toward mobile payments is picking up speed around the world.

For MercadoLibre, mobile now represents 3.5 percent of its traffic. The company is working hard to expand its mobile presence, through the continual development and release of new apps.

The Samba Surge
Shares of MercadoLibre have maintained momentum so far this year, despite the overall pullback of emerging markets (see stock graph, below).
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The company's resilience in recent months amid the regional market slump bodes well for the stock's future performance, as global economic recovery accelerates and the Latin middle class increasingly indulges its desire to shop online.

Throughout Latin America, leaders are plowing considerable sums into infrastructure spending, including Internet development, and pursuing policies designed to shift their economies from a heavy dependence on exports toward domestic demand.

Governments also are implementing reforms such as individual and corporate tax relief, minimum wage hikes and business deregulation, all designed to boost indigenous consumption. These trends are substantial tailwinds for MercadoLibre.

In August, the company reported second-quarter operating results that blew past analysts' expectations.

MercadoLibre's earnings increased 18 percent compared to the same quarter a year ago, driven by higher merchandise volumes and payment transactions. The company also posted a year-over-year jump of more than 23 percent in the size of its user base.

Total revenue in the quarter rose 26 percent to $112.18 million from $88.84 million in the year-ago period, marking the third straight quarter of revenue growth. The consensus revenue estimate had been $107.62 million.

Second-quarter merchandise revenue reached $1.73 billion, an increase of 33 percent from the same year-ago period. Total payments revenue was $577.9 million, a year-over-year increase of 40 percent.

Items sold on MercadoLibre during the second quarter increased 27 percent to $20.1 million, while total payments transactions through MercadoPago grew 35 percent to $7.4 million.

Second-quarter earnings increased to $29.98 million, or $0.67 in earnings per share (EPS) from $25.38 million or $0.57 in EPS in the same period last year. Analysts expected EPS of $0.62.

The company's number of total registered users at the end of the second quarter was 90.2 million, up 23 percent year-over-year. New registered users during the period increased 22 percent to 4.5 million.

The stock sports a 12-month trailing price-to-earnings (P/E) ratio of 51.8, pricey compared to the trailing P/E of 31.4 for the company's industry of Internet software and services.

However, with a market cap of $5.34 billion and a powerful shareholder in eBay, MercadoLibre is in solid shape to survive the vicissitudes of its often volatile field and prosper over the long haul.

For the past five years, MercadoLibre has racked up annual average earnings growth of 35.4 percent. In fact, MercadoLIbre has grown every year since it was founded in 1999, a predictability that should only get stronger as e-commerce continues to supplant bricks-and-mortar retailing in Latin America.

Even if emerging markets remain in their funk this year, the case for investing in MercadoLIbre isn't solely predicated on the region's future gross domestic product growth, although it certainly plays a role. Rather, the company is a direct play on the rise of a sophisticated middle class that is inevitably adopting the online shopping habits of the developed world.

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In Uncertain Markets, Turn to Unstoppable Cash Flows

8/25/2013

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If you have been reading the articles and reviewing the recommendations on the site, by now you should have noticed a distinct pattern. Just about every option or dividend play is on a Blue Chip market dominator. There is a reason for that. We like to invest in companies that have the biggest market share and a history of consistent corporate and dividend growth. With all those factors, it is hard to lose. These are stocks we WANT to own even if we are in it for the option premiums.

In today's digital world, companies like Cisco (Nasdaq: CSCO), Intel (Nasdaq: INTC), and Microsoft (Nasdaq: MSFT) are similarly consolidating and moving to more utility-like positions of power. Even better, government regulation is not behind their ascendance. (So they shouldn't face the same kind of geographic limits or pricing regulations that traditional utilities have.)

That's why we call these types of companies Digital Utilities. They have nearly guaranteed profits. If you're going to use the tools of our modern digital age then you have no choice but to use these companies' products and services. (Try boycotting all Intel products, for instance. You can't easily do it.)

Specifically, we're going to use Cisco to trade the sector. Cisco makes the switches and routers that allow the Internet to work. We've traded this company in the past. So I won't spend too much time talking about what it does. What's more important is just how today's market sets up the perfect opportunity to open a position on Cisco.

First, rising interest rates will help – not hurt – its profits. Digital Utilities generate and hold tons of cash. That means they don't need to borrow money. So rising interest rates won't increase their borrowing costs.

Even better, rising rates will allow Cisco to earn higher returns on its cash balances. Even a rise of 1% will mean big money on the billions of dollars it holds in cash. An extra 1% in yield would add an extra $500 million to Cisco's annual earnings.

And if the Fed does begin to taper its bond buying, that will mean the central bank has seen significant signs of an economic recovery. Corporate clients are critical to Cisco. So far, business investment in technology products has started to show signs of life, but it's still well below what we'll see with a healthy economy.

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Once that picks up, the benefits to market dominators like Cisco will be huge. Finally, anyone who argues stocks are overvalued isn't looking at Cisco. The company trades for 10 times cash flow and 10 times earnings. Cisco holds $50 billion in cash, with $7.4 billion in free cash flow, a return on equity of 18%, and a yield of 2.8%. That's why this month I recommend you put on a trade with Cisco.

Here's How the option trade for Cisco works:

Today, I recommend you...

Sell, to open, the Cisco (CSCO) November $24 puts for around $1.15 with the stock trading around $24.

The puts obligate you to buy CSCO at $24 a share if the stock falls to less than that by option-expiration day (November 15). Selling these puts gives you $115 in your account per option contract. (Remember... one option contract equals 100 shares of stock.)

Buying 100 shares at $24 each represents a potential obligation of $2,400. To put on this trade, you will have to deposit a "margin requirement" – essentially a security deposit that reassures the broker that you can cover your potential obligation. It usually runs about 20% for put sales. (In this case, 20% of $2,400 is just $480.)

Here's the math...

Sell one CSCO November $24 put for $115.
Place 20% of the capital at risk in your option account, $480.
Total outlay: $365.

If the markets remain unchanged and CSCO trades for more than $24 on November 15, you won't have to buy the stock. You keep the $115 premium (and the $480 margin). That's a simple 24% return on margin in less than three months. If we put this trade on every three months – assuming all prices remain the same – this could return 96% a year on the margin amount.

If CSCO trades for less than $24 on November 15, you'll keep the $115. But you'll have to buy CSCO stock at $24 per share. So you'll own CSCO at $22.85 (the $24 strike minus the $1.15-per-share premium). Here's how that scenario works out for each option contract you sell...

Initial income from sold put premium of $115.
Purchase of 100 shares of CSCO at $24 is $2,400.
Total outlay: $2,285.

The cost ($22.85) is roughly 4.8% less than CSCO's current market price. This gives a huge amount of downside protection on a company that mints money. Plus, if you become a shareholder, you'll also receive the company's $0.68-per-share annual dividend. If CSCO pays its expected dividend over the next 12 months, you'll receive a total of $183 ($115 in premium plus $68 in dividends) on a $2,400 investment... 7.6% cash on your investment in the first year. And we'll likely sell call options against the stock to further boost our returns.

Note: The prices in this example reflect morning trading on August 23.

IRA Alternative for CSCO

If you're using an IRA or Roth IRA that bars you from selling puts, you can open an alternative covered-call position... (These alternative trades can also be done in your regular brokerage accounts.)

This is the same strategy we use to generate income on stocks that are put to us but if you prefer to start by owning shares and selling calls, the trading strategy works just as well. The math is nearly identical and the returns are similar when you sell puts versus covered calls (in terms of your potential obligation, the so-called "capital at risk"). As always for each trade, execute either the call or put trade, but not both.

Remember with covered-call selling, you are selling a call option and simultaneously buying stock. Thus, the option is "covered" with stock. And when you enter the trade in your trading platform, you should do it as a combination buy/write, or covered call.

This means you will be paying for the stock minus the premium you receive for selling the option – what's called a "net debit." Here is how the CSCO trade works as a covered call:

Buy 100 shares of Cisco for about $24.00, and
Sell, to open, the CSCO November $24 calls for about $1.00.

This represents a total outlay (or "net debit") of $23 (the $24 stock price minus the $1 we receive from the call premium). Remember... you are buying 100 shares of the stock for every call option you sell against it.

Here's how the math works:

Income from sold call premium of $1 is $100.
Purchase of 100 shares of CSCO at $24 is $2,400.
Initial outlay: $2,300.

If CSCO shares sell for $24 or more on November 15, the stock will be "called" away from you at $24 a share. This gives you a net gain of $1 per share on the position (the difference between our initial outlay and the price at which you sold your shares). This is about 4.2% in less than three months, for an annualized return of about 16.7%.

Of course, if the stock trades for less than $24, your calls will expire worthless and you'll still own the stock, uncovered. You can keep the $1 premium and the future dividend stream from 100 shares of CSCO. That should amount to $68 a year per 100 shares. This is a total of $168 (the $100 premium plus the $68 dividend) on a $2,400 investment, or about 7% this year. As always, put no more than 5% of your portfolio into this position. And hold it with a 20%-25% stop loss.

What to Do if Prices Move

In the example above, we're giving you the most recent prices as of mid-morning August 23. However, we realize prices can change by the time you go to open a position. If there are small price moves, you can still enter the trade. Just pay attention to the initial outlay – the net debits and credits described above.

Try to keep your net debit (in the case of covered calls) at or less than what we recommend. The credit for opening a put sale should equal or exceed what I described above.

For example, we recommend selling the CSCO November $24 call for around $1 with the stock trading at $24. This gives you an initial outlay of $23 a share. (The $24 stock price minus the $1 premium.)

If on Monday, the stock moves up to $24.50, you'd want to receive a premium of about $1.25. This would give you an outlay of $23.25. Keep in mind that as we get closer to option expiration day, the option loses time value, so your outlay may be a bit more than what we recommend. Similarly, if the stock moves down a dime or two, you'll pay less for the stock, but also get less for the call option.

The following table will give you a rough guide for prices we think represent good opportunities to open the recommended Cisco position over the next few trading days.
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Volatility is heating up again...
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After a slow summer, the Volatility Index ("VIX") is moving higher. The VIX represents the amount of money (in option premiums) people will pay for the time value embedded in options. Remember spikes in volatility generally represent an uptick in investor fear. They reflect periods when investors are willing to pay more for options that protect them in a falling market.

Last month, I predicted volatility would rise later in the summer as Wall Street gets back to work; and the move is good news for us. When volatility is higher, we make more money on option premiums.
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The Market's Next Move

8/22/2013

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MARKET CONDITIONS

The bears have been in control of the stock market for the past few weeks. After making a new all-time high above 1,700 in early August, the S&P 500 has fallen. It closed Tuesday at 1,652 – down 3.5% from its peak.  

Lots of folks will argue the selling isn't over yet, and stocks have further to fall. For the most part, I agree with that thinking. I've been looking for the S&P 500 to retest its June low near 1,570 for the past month.   In the very short term, though, stocks are oversold and ripe for a bounce. In fact, the decline over the past few weeks looks a lot like the decline we saw in early June.

Back then, stocks hit extreme oversold levels, bounced enough to relieve that condition, and then dropped to a lower low. We may see something like that happen this time as well. A couple of technical indicators are pointing that way. Take a look at the McClellan Oscillator – a measure of short-term overbought and oversold conditions.
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On Monday, the oscillator dropped to its second-most oversold reading of the year. On the following chart of the S&P 500, you can see how a similar condition in early June led to a quick bounce and then a decline to even lower prices.
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The bounce doesn't look like much from the chart, but it was good for about 30 S&P 500 points. A similar bounce right now would push the index back up to around the 1,680 level. The Volatility Index (the "VIX") also suggests we may see higher stock prices in the short term.
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The VIX closed above its upper Bollinger Band on Monday. That's an extreme move that often leads to a short-term reversal when the VIX closes back inside the bands.  

You can see the same condition in early June, when the VIX closed above its upper Bollinger Band and then reversed. That reversal kicked off a bounce in the broad stock market. When the bounce ended, the S&P 500 dropped to a lower low, and the VIX climbed to a higher high.  

Right now, traders should be watching for a bounce. Look for the S&P 500 to rally toward the 1,680 level and for the VIX to reverse lower and test its middle Bollinger Band (just like it did in June) around 13.25.   That should be enough to alleviate the current oversold condition and set the market up for a more significant decline.
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3 Bargain-Priced Stocks Yielding Up To 5.4%

8/22/2013

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MARKET CONDITIONS

PROFILED:  BuArcelorMittal (NYSE: MT)      
                            
ArcelorMittal (NYSE: MT)
                                   Banco Santander Brasil
                                   (NYSE: BSBR)

As the market reaches near record highs, it's becoming harder to find value. Historically, the average price-to-earnings (P/E) ratio of the S&P 500 is about 15. Today, the average is 19.

I'm not saying we're in a crazy bubble or the market is about to collapse. I'm only saying that stocks have gotten more expensive recently as low Treasury and savings account returns have forced investors into equities in a desperate search for yield.

You may remember May 2009 when the average P/E ratio for the S&P 500 hit an all-time high of 123 (a number that is literally off the chart below).
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Of course, the P/E ratio is just one measurement of value. Others include the price/earnings-to-growth (PEG) ratio, dividend growth, earnings per share (EPS) and free cash flow.

Peter Lynch was partial to using the PEG rate to value companies. In his book, "One Up On Wall Street," Lynch wrote:

"The P/E ratio of any company that's fairly priced will equal its growth rate."

Since the equation for PEG looks like this:

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What Lynch might term as a fairly valued company will have its PEG equal to 1.

  It is a basic tenet in the Benjamin Graham value school of investing that the biggest gains are made by finding undervalued companies.

But we're not just pursuing any old undervalued company -- some stocks are in the dumps for a good reason, and we don't want to touch them with a 10-foot pole. 

We're looking for companies that have been "unfairly punished" by market sentiment, have suffered temporary setbacks, and are poised for big turnarounds.

A recent example of this phenomenon is Barrick Gold (NYSE: ABX). When I wrote about Barrick a few months ago, shares were trading at its the lowest price since 2004. For the reasons I explained in that article, I thought the market had pushed Barrick into oversold territory.

I was wrong about the bottom -- Barrick continued to slide for another month. But since hitting bottom a month ago, Barrick is up 25 %, with no signs of slowing down.
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Let's look at three stocks poised for a similar comeback.
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You'd have to go back to 2005 to find share prices this low. With a forward P/E of 5, a PEG ratio just over 1, and share prices below book value, Buenaventura has seen better days.

But the recent uptrend in gold prices, combined with several new projects under production, could be the catalyst the company needs to turn things around.

In 2010, Buenaventura began production at its La Zanja gold mine in Peru. The mine is expected to produce 100,000 ounces of gold per year at below-average costs. The mine is operated as a joint venture with Newmont Mining (NYSE: NEM).

Tantahuatay, another Peruvian gold mine with similar production estimates and costs, began production in August 2011. The company's Chucapaca project is expected to be a top-tier asset, but won't begin production for several years.
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Because its assets are located in Peru, there are geopolitical risks that come with an investment in Buenaventura. However, these risks are offset by the fact that the company has been on good terms with the country's government since the company's founding in 1953.

With the sudden uptick in gold prices, Buenaventura shares have risen sharply over the past week.
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Shares of the world's largest steel producer are are trading at its lowest price since 2004. ArcelorMittal is trading at less than half of book value with a PEG ratio of -5 and a P/E ratio of 14.

Although the steel industry has been hammered by the Great Recession, there are signs of economic recovery, especially in Europe where the company is based. Emerging markets remain fertile territory for expansion.

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ArcelorMittal supplies 20% of automakers' steel worldwide. In emerging markets, which represent 80% of global demand, the company has been aggressive. It now boasts a 30% share of the Brazilian steel market and is fighting for an increased presence in India and China.

Although it owns minority interests in two Chinese steel producers, it will be an uphill struggle for ArcelorMittal to establish any kind of dominant role in China. China is the world's largest consumer of steel, yet the Chinese government has kept tight reins on the market and has blocked any attempts at majority holdings by foreign companies.
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It may seem crazy to recommend a Brazilian bank, even when it's trading for historically cheap prices. After all, the country has a scary history of sudden inflation and government intervention into private business.

But the fact is the company generates enormous amounts of consistent free cash flow ($8 billion last year) and has paid a dividend over 3% for the past three years.

Here's why BSBR could be poised for a turnaround:

In Brazil, six banks control more than 90% of the banking system's assets.

And of these six, BSBR is the smallest. With just 10% of the country's current market share, it has plenty of room to grow.

The company is majority owned by Banco Santander (NYSE: SAN), Spain's largest bank.
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This controlling interest can be seen as a positive in the sense that BSBR has a "Rich Parent" relationship with SAN. SAN's experienced management team has provided guidance for SAN during recent acquisitions and also gives the company a leg-up when recruiting international clients.

Banco Santander Brasil is currently trading at half of book value with a forward P/E of 7 and a PEG ratio just over 1.

***Risks to Consider: All three stocks carry considerable risk, primarily due to geopolitical concerns. 


Action to Take --> These companies have been around for a while, pay dividends, and at these prices, have considerable upside potential. 

My favorite stock of the three is Buenaventura. I've been bullish on gold miners for a while now due to the huge disconnect between their valuations and the price of gold. The stock is currently in an uptrend and should make for a great short-term investment at recent prices.

For contrarian investors eager to buy when there's "blood in the streets," all three stocks fit the bill.

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Profit From Spinoff Companies

8/22/2013

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MARKET CONDITIONS

Overall, spinoffs have historically outperformed their parent companies. Management typically learn from their mistakes and put more conservative types in place to run the spinoffs. Some MLP spinoffs are perfect examples of this. Consider investing in spinoffs and subsidiaries as hedges against their blue chip parents.

PM By Marshall Hargrave

There's no such thing as a free lunch, but spinoff companies are as close to free as you can get. When a company is spun off, there's a high level of forced selling. One of the best ways to think about spinoffs: "There's a natural constituency of sellers and not a natural constituency of buyers," according to "Margin of Safety" author and hedge fund manager Seth Klarman.

Simply, many shareholders who own shares of the parent company are not interested in owning the spinoff. This can be for a variety of reasons, such as different business fundamentals, weak management, or negative cash flow. In most cases, investors are selling the company for no good reason. While on the other side, the buyers are limited, as the market is inefficient in digesting data on new spinoff companies. 

Spinoffs Versus The Market 
Yet, over the long term, spinoff investing tends to outperform the broader market. This is not new information. A 1993 study titled "Restructuring Through Spinoffs" found that spinoff companies outperformed the S&P 500 index by 30% on average during their first three years. A similar study by Lehman Brothers concluded that between 2000 and 2005, spinoff companies outperformed the market by a whopping 45% during their first two years. JPMorgan Chase (NYSE: JPM) came to similar conclusions, finding that spinoffs outpaced the market by 20% during their first year and a half between 1985 and 1995.

So far this year, spinoff companies have maintained that standard. The Guggenheim Spin-Off (NYSE: CSD) exchange-traded fund is up 30% this year, compared with the S&P 500's 16.5%.
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Earlier this year, Abbott Laboratories (NYSE: ABT) completed a split after realizing the company had grown into two distinct units. AbbVie (NYSE: ABBV) now trades as the former pharma business of Abbott Labs, while Abbott continues as a health care products and medical devices company. 

The idea of breaking up the health care and pharma businesses was to make the companies easier to value. However, it appears the market has gotten this one wrong. Spinoffs are great ways to fix mistakes. As a result, spinoffs generally have weak management, lower margins, lower returns on equity, or negative earnings. This is not the case with AbbVie. The stock had a nice run out of the gate, but interest and trading volume have since cooled off.
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But investors should give AbbVie another look. Sometimes the market fundamentally misunderstands spinoffs. In this case, the market is treating AbbVie like a typical problematic spinoff -- but in reality, AbbVie appears more fundamentally sound than Abbott itself.

Breaking Down The Numbers
AbbVie is trading with a price-to-earnings (P/E) ratio of 13, which is well below Abbott's 60. AbbVie has an impressive 33% operating margin for the past 12 months, compared with Abbott's 20%. Abbvie is also churning out a return on capital employed (ROCE, equal to operating income divided by capital employed) of 43.5%, compared with Abbott's 21.6%. 

While the companies' business models are debatable, there's no denying the strength of AbbVie's cash position and dividend yield. AbbVie has $5.50 in cash per share, which covers 12% of the share price, and the company generated $4 per share in cash flow from operations over the trailing 12 months.

AbbVie has a solid 3.6% dividend yield, which is in line with (and in most cases above) other major pharma companies and dwarfs the 1.6% yield of Abbott, its former parent. Yet unlike some of its peers, AbbVie's dividend payout (as a percentage of earnings) is below 50%. AbbVie's board has also authorized a $1.5 billion share buyback program, representing just over 2% of shares outstanding.

What About The Business?
AbbVie's key drug is Humira, an anti-inflammatory product used primarily for rheumatoid arthritis. In 2012, Humira accounted for around half of AbbVie's $18.4 billion pro forma revenues. Last year, the drug accounted for about 50% of the market for rheumatoid arthritis drugs, which is expected grow to more than $25 billion in 2017, up nearly 40% from  2012. 

One concern is the fact that Humira will lose patent protection in 2016 in the United States and in 2018 in Europe. However, AbbVie's total research and development (R&D) pipeline has more than 20 compounds in Phase II or Phase III development, including five key products planned for launch before 2016. 

Humira is also approved for a number of other uses, which includes HIV, Crohn's disease, psoriatic arthritis and several other ailments. These uses and the drugs in AbbVie's pipeline should help AbbVie offset any fall-off in Humira revenues.

AbbVie, which gets more than half its revenue from outside North America, has a number of growth opportunities in the U.S. and internationally. Emerging markets should see tailwinds from increased spending on health care, and in the U.S., the Affordable Care Act (aka Obamacare) is expected to provide coverage for more than 30 million uninsured Americans next year. All in all, the company has company- and industry-specific tailwinds for which the market appears to be mispricing ABBV. 

Risks to consider: As with any pharma company, there are risks that patents will be challenged or the company will fail to produce new revenue-generating products. AbbVie faces patent expirations for its top drug Humira in the next several years, which could be a negative if its other products fail to come to market in a timely fashion.

Action to take --> Consider buying shares of AbbVie, which has a well-developed R&D pipeline and a cheap valuation. With just a modest 20 times P/E multiple on AbbVie management's 2013 EPS forecast of $3.10, the stock should trade north of $60. Its solid cash position and robust dividend also give the stock some downside protection.
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Common Sense Dividend Investing

8/20/2013

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MARKET CONDITIONS

Note: Entering a 'stop order' in your brokerage account is investing suicide. You could get taken out by 'market makers' during intraday trading. So how should you protect your investments? Simple. This new service tells you exactly when it's time to exit your position… and it's totally private – so you're protected. Click here to learn more about it.

Let's use Becton-Dickinson (BDX) as a "case study".  

Becton-Dickinson is the World Dominator of needles and syringes for the medical industry. Odds are you've come into contact with the company's products dozens of times in your life and never realized it.   Like many global dominators, BDX was the driving force in creating the industry it dominates today.

In 1906, it built the first plant in the United States for making needles and syringes. And in 1925, BDX began offering the BD Yale Luer-Lock Syringe, which created a secure way to attach and remove a needle from a syringe. Luer-Lock connectors remain an industry standard today. BDX is also the top maker of safety devices to prevent needle-stick injuries.   BDX has an extraordinary brand, and it is No. 1 in its industry.

Those are "on the surface" clues to finding these stocks. But we also need to look inside the company... to find the financial clues of a global dominating business. To say Becton-Dickinson has all the financial clues of a World Dominating Dividend Grower is the understatement of the year.

One of the hallmarks of a global dominator is consistent profit margins. This is the amount of money a company earns from each dollar of sales. A great business should have consistent profit margins, so it can pay you a consistent stream of dividends but that company should also have a sustainable long-term competitive advantage so it can consistently earn those profit margins.  

Becton-Dickinson's gross margins (the margin earned before deducting the basic costs of doing business) are consistently above 50%. Its net margins (the margin earned after deducting all expenses and income taxes) have consistently been between 14% and 17% for at least 10 years. That's huge. Most businesses are ecstatic to earn net margins of 5% or 10%.  

Another hallmark of a global dominator is huge free cash flow. Free cash flow is the final "cash in hand" number that a business owner has after deducting expenses. It's a vital number for investors. BDX gushes free cash flow. On sales of $7.9 billion, BDX generated just over $1 billion in free cash flow the last four quarters. 

A third sign of a global dominator stock is a strong balance sheet. As shareholders of a business, we want to see lots of valuable assets and low debt. We want a strong balance sheet so we don't have to worry about tough times causing a bankruptcy. Becton-Dickinson has an excellent balance sheet. It has $2.3 billion in cash and short-term investments and less than $3.9 billion in debt. BDX's debt is very small compared to its earnings. Its earnings cover its interest expense nearly nine times over.

Just imagine earning nine times your mortgage payment every month!   Finally, for a company to qualify as a global donminator, we need to see a history of dividend growth. Becton-Dickinson is one of the best dividend-growth stocks in the world. BDX has relentlessly raised its dividend every year for the last 40 years. Its last increase was by 10%.
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Becton-Dickinson pays out roughly one-third of its earnings per share in dividends. So there's plenty of room for big dividend growth in the coming years. Right now, BDX yields about 2%. If it maintains its 10% annual dividend growth, you'll be making about 14% annually over your original cost in 20 years. 

To sum up, there are obvious things to look for when you're after the world's safest, best dividend-paying stocks... the kind you can hold for decades and get rich. This includes a dominant brand and the top position in an industry.  Today's essay shows you some vital "financial clues" for finding these stocks and why Becton-Dickinson is a great example.
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