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Danger: Resist the Temptation to Chase Stock Prices

By , Global Credit Strategist, Money Morning • @MichaelELewitt -

stock prices

The week running up to Easter ended with a punk jobs report that punctuated a first quarter filled with a stream of consistently bad economic data.

March nonfarm payrolls grew by only 126,000, far below consensus estimates of 225,000. Worse, 69,000 jobs were subtracted from January's and February's tallies. The unemployment rate stayed at 5.5% only because the job participation rate jumped back up to its lowest level since 1978.

And while the cock-eyed optimists who are waiting for the economy and the markets to reach escape velocity like Vladimir and Estragon are still waiting for Godot were rushing to blame the number on the weather, the government reported that 182,000 people reported they couldn't get to work because of the weather in March - in line with historical norms.

It isn't the weather that is hurting the economy...

Three Cheap U.S. Stocks with Huge Profit Potential

By , Money Morning -

Bargain-hunting investors this year have been able to feast from a market buffet of cheap U.S. stocks.

Reports have surfaced in the past few months about how the Standard & Poor's 500 is offering the lowest-priced stocks in years based on price/earnings ratios.

Bloomberg in March reported that companies in the S&P 500 were trading at 14.1 times earnings, the lowest valuation of all 34 peak periods since 1989.

Then in May former U.S. Federal Reserve Chairman Alan Greenspan declared that "stocks are very cheap."

Again just last week Bloomberg noted that the S&P 500 is trading 16% below its average valuation since the 1950s.

Now, after the S&P 500 recorded its best June since 1999, investors want to know if it's still the time to buy or if the party's over. With the Eurozone debt crisis still looming and a spate of recent gloomy U.S. economic reports, market optimism has thinned.

But there are still bargains to buy.

How to Find Cheap U.S. Stocks

First, to determine if a stock is undervalued with high profit potential, and not cheap and going nowhere, investors need to scrutinize the driving factors of why a stock's price has fallen.

For instance, you must look at what's happening to the stock's sector - is there a macroeconomic or cyclical reason for the stocks to slip?

Then look at the company - is it in healthy financial shape? What are its future prospects?

Some stocks like Bank of America (NYSE: BAC) may seem undervalued when looking at tangible value, which tells us BAC is worth almost double what it is trading at now. But the company posted negative earnings per share last quarter. Analysts expect it to post a positive EPS of 16 cents this quarter and give it a forward P/E just above 8, which is cheap - but it's a stock that comes with a lot of volatility, so its low price is risky.

Others have had a long slide and may be at a bottom, such as tech struggler Hewlett Packard (Nasdaq: HPQ). CEO Meg Whitman is trying to turn the company around, but HP has lost more than half of its market value over the past year. With its forward P/E less than 5 it seems like a bargain, but there isn't a strong case for why this stock could rally.

And finally look at General Motors (NYSE: GM) or Ford Motor Co. (NYSE: F). Both currently have P/E ratios below 6 and even though the auto industry has been one of the hardest hit U.S. sectors over the past few years it looks to be on the upswing now.

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Why Dividend-Paying Stocks Should be on Your "Buy" List

By , Contributing Writer, Money Morning -

Market environments like this one are when dividend-paying stocks can be an investor's best friend. Although the major indexes have shown signs of building a base in recent days, the market's overall performance during the past six weeks has been less encouraging. Despite several big up days, the Dow Jones Industrial Average is still down […]

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Five Cheap Stocks for an Undervalued Market: KCG, AWP, WLP, MT, CNBKA

By , Contributing Writer, Money Morning -


Last week marked the third anniversary of the bear market low, and there is compelling evidence that we still have an undervalued market - meaning investors can find cheap stocks.

Even though the S&P 500 Index has nearly doubled off its lows of March 9, 2009, it is still trading at only about 14.1 times earnings, well below its 15-year average of 20.2.

In fact, earlier this month when the markets hit 52-week highs, that was the "cheapest" stocks have been since 1989,according to Bloomberg News.

The index gained 8.6% in the first two months of this year, its best start since 1987. And that came after a rally that added 24% and about $3.2 trillion in value to shares since October.

But after one of the most volatile years on record, nervous investors can't seem to decide whether the glass is half-full or half-empty.

"What you're seeing is a gigantic exercise in behavioral finance," Brian Barish, president of Cambiar Investors LLC, told Bloomberg. "The ability to scare the hell out of people is much greater than the ability to attract them to equities."

Higher Corporate Earnings Create Cheap Stocks

Meanwhile, the government's easy money policies have combined with productivity gains to push corporate earnings to record heights.
Analysts at Standard & Poor's estimate operating earnings will rise from $96.34 in 2011 to a record $104.82 in 2012.

That would represent a 72% increase in earnings since 2010. By comparison, the stock index has recorded a 21% gain during the same period.

S&P analysts say earnings will climb to another record of $111.73 in 2013. But they project higher corporate earnings will drop the P/E from 14.1 to 12.2.

So what is it that's making stocks relatively cheap compared to higher earnings?

Simply put, investors continue to defy logic by shunning stocks and piling into bonds.

Despite record low interest rates, investment-grade bond funds took in a record $3.3 billion during the week ended Feb. 15 while equity funds had outflows of $1.9 billion, according to data provided to Bloomberg by EPFR Global and Bank of America Corp. (NYSE: BAC).

Meanwhile, traders have been bidding up the prices of options that will protect them against stock losses to the highest in four years, according to Bloomberg.

The flight to safety has driven the S&P 500's earnings yield (earnings divided by index price) to 7.3%, nearly a record high.

With the spread between the earnings yield and risk-free 10-year Treasuries about 5.8%,stocks are now cheaper than they were in 2002 or 2008. In fact, the last time the spread was this lopsided was 1975, when stock prices jumped 32%.

All this suggests that something has to give. Either Treasury prices will have to plunge or stock prices will have to rise - by a lot.

So what's an investor to do?

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Three Glencore Xstrata Takeover Targets: TCK, AAL, FCX

By , Contributing Writer, Money Morning -

The proposed mega-merger of Glencore International PLC and Xstrata PLC will create a global powerhouse with the potential to shake up the mining industry overnight.

If completed, the $90 billion deal will form a mining behemoth with control over one-third of the global market for thermal coal, and make it the world's largest producer of integrated zinc production. It will also rank as the world's third-largest copper producer and fourth-largest nickel producer.

Basically, the merger would create a super-giant that could compete with the industry's heavyweights - BHP Billiton Ltd. (NYSE ADR: BBL), Rio Tinto PLC (NYSE ADR: RIO), and Vale (NYSE ADR: VALE) - the mining industry's "Big Three."

The merger is certain to spark volatility in the sector, according to Money Morning Global Resources Specialist Peter Krauth, an expert in metals and mining stocks who runs the Global Resource Forecast investment service.

"What observers need to understand is consolidation like this concentrates decision making," Krauth said. "The fewer participants in an industry, the more impact they have.

When output is either increased or decreased by one or more mega producers, it will also have a larger impact on world supplies, and therefore prices."

With that kind of power, the Glencore-Xstrata deal will form a goliath with the appetite - and the muscle - to swallow its weaker rivals.

Glencore Xstrata: Hungry for Mergers

Based on estimated 2011 results compiled by Credit Suisse Group AG (NYSE ADR: CS), the new company would have revenue of $211.3 billion and net profit of $7.5 billion. That kind of clout would make its stock valuable currency for more acquisitions.

Plus, both companies are led by aggressive chief executives that have a history of snapping up competitors.

Xstrata has been racking up spectacular growth through acquisitions, although lately it has focused on organic or internal growth to boost production by 50% by 2014.

Glencore, a trader of metals, minerals and oil, has said the main idea behind going public after almost four decades as a private company was to grab acquisitions.

Of course, the new company would have more going for it than sheer size and a forceful management team.

Glencore has a giant global intelligence network of 2,000 employees in about 40 countries. Many of them are traders and marketers that collect extensive data on what commodity buyers want and when.

"Glencore's network makes the CIA look like your grandmother's coffee club," columnist Eric Reguly recently wrote in The Globe & Mail. "It has been adept at forecasting commodity prices based on intimate knowledge of production, demand, regulations, political whims, transport costs and movements everywhere."

Glencore's intelligence network will likely direct it to takeover targets that have iron ore resources, an area where Xstrata currently lacks exposure.

The industry's Big Three control nearly 70% of the one billion-ton annual iron ore seaborne trade, along with contract pricing. Lately they've been dampening prices by flooding the market with iron ore, driving high-cost producers out of the business.

But their mushrooming market shares have triggered more regulatory reviews by concerned governments. That should clear the way for the new Glencore Xstrata entity to target smaller competitors without the Big Three interfering.



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Cash-Secured Puts: Keep the Cash Flowing - Even After You've Sold the Stock

By , Contributing Writer, Money Morning -

In January, I told you how you can double or even triple your yield by selling "covered" calls on your dividend stocks.

While this is a safe and highly effective strategy, selling covered calls does have a drawback - of a sort.

If the stock you're holding rises in price before the calls you sold expire, you could be forced to sell the shares at the option's designated strike price.

This isn't likely to be a huge problem since you'll be selling your stock at a profit. The problem is that if you no longer own the stock, you won't be getting the dividend.

Fortunately, this problem has an easy solution. It's a strategy called selling "cash-secured puts."

Using cash-secured puts, you can maintain your cash flow while you're waiting to repurchase the actual stock at a price equal to or below where you just sold it.

How to Use a Cash-Secured Put to Generate Income

Here's how it works.



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