Brexit, Smexit, Who Even Cares?

The European Union & The Brexit

    You may have heard on the news lately that the United Kingdom (UK) was planning on leaving the European Union (EU). Many people in the UK have been disgruntled with the EU and finally, after a conservative party win in an election, a referendum was held to finally decide—  leave or stay.

    You may be wondering what the EU and Brexit are, or maybe even what the United Kingdom is. Surprisingly enough, you aren't the only one. After polls closed and the results showed in favor of leaving the EU, the people of the U.K. took to google to ask a few "solid" questions such as: "What's the EU?", "What is Brexit?", and "What happens if we leave the EU?".

    So, who even cares? Well for starters, Europe does—and so does the United Kingdom—but you should too. Before we delve into why you should, let’s take a look at some background information on the European Union and the Brexit.

    The EU started as the European Economic Community in 1957 with the "Treaty of Rome", involving Belgium, France, Italy, Luxembourg, Netherlands, and West Germany. It was created out of a sickness European leaders had for the constant warring that had been plaguing Europe for

Current EU Countries

centuries culminating in World War II. In many ways, the impact of it was felt greatest with the economic ties that were created and the resulting free trade that was initiated between the participating countries. Since then, several other treaties have been signed like the Manstricht (creating the euro and economic rules) and Schengen (allowing free travel between countries) and 22 other European countries have become members with many more to follow.

    Brexit, is the exit of the UK from the EU. There are a multitude of reasons why the UK wants to distance itself from the EU—EU immigrants are taking UK jobs (and welfare benefits), "unsecured borders", high costs of membership, and the difficulty of trading with non-EU members.

    How will this affect the U.S.? Realistically, I don't foresee a recession like  ‘07 happening, so we can all calm down a bit.

    However, if you really want something to worry about, consider this: If the EU and the UK can't negotiate on some sort of exit that doesn't completely ruin trade relationships, then we might have a problem. If we pretended that the EU was one giant country, it would be the world's largest economy

EU Flag

with a GDP of $16-19 trillion.  The UK is the second largest country in the EU and 6th largest in the world at almost $3 Trillion GDP. Meanwhile, the U.S. is in the Top 5 of exporting and importing partners with the UK. The Brexit might actually help their trading relationship with the U.S. or China since they won't be bound by EU rules anymore. However, if you look at who makes up the majority of their exporting and importing partnerships, you’ll find that they are EU countries. This will undoubtedly hurt both economies because of the loss of trade agreements once the UK officially leaves the EU. There will be a negative impact on the price of goods, job creation, and financial markets.

    While we are not dependent on the UK or the EU by any means, we are a large part of the exporting and importing trade for both of them. This could be a potential drag on U.S. financial markets or to any businesses with large ties to the European economy. The most likely scenario for now is that you will see a roller coaster pattern forming out of your retirement account values. Markets will crash for a day or two and then go back up when people's’ fears subside. This will likely continue to happen as small details continue to emerge about the ramifications of the UK leaving the EU.

    Who is it bad for? People nearing retirement age. Usually massive market fluctuations are a drain on the nerves of those about to retire since some of their assets may be adversely affected. However, if your retirement portfolio was managed correctly, most of your current assets should be relatively protected from this period of uncertainty.

    Who is this good for? Specifically, for young people just entering the investing world. But, it could be a great opportunity for anyone with cash that can be invested. The fluctuations in the market

Brexit Referendum Results

should end up giving you a chance to purchase great companies at a significant discount. For example, I recently acquired stock in Toyota Motor Company (TM) for a 5% discount. However, you need to enter this type of market atmosphere having done your due diligence. The only reason I purchased TM was because I had done a few months of research before the purchase, but was merely waiting on a good time to pull the trigger. Little did I know the next day TM would drop another 5%. It can be a bit nerve wrecking at times, but remember that purchasing good companies at great prices will more than likely result in profit, just have patience.

    Depending on how the United Kingdom decides to deal with their exit from the EU and vice versa we may have a few exciting years in front of us. This will not be done anytime soon and there are even rumors that it may not even happen. I would take this period to look at where you stand financially and possibly get some advice from others that may be going through the same type of scenario. It could potentially help you immensely with your future financial standing!

Educational Inequity

Educational Inequity: Why Businesses Should Care About Their Community’s Education

    A big problem that I have noticed while working in a warehouse setting, is the lack of basic skills needed to be a productive employee. Some of the warehouse associates (general labor) are lacking in problem solving, computer, mechanical, and in some cases even language skills (this may be due to English being their second language). So where does this problem come from and how can we solve it? I’m about to offer a solution that would kick-start an end to educational inequity.

    As you can imagine, one of the biggest problems companies face is finding talented employees. That applies to all companies, from giants like General Electric to your local corner store. But the difference is that General Electric, because of their sheer size, has more freedom in who they can employ and where they choose to be located. Those corner stores and small businesses don't have

Great Lakes Science Cennter & MC2 Campus

the same luxury. They have to find their employees from their surroundings because it would be too costly to relocate. Now what if their surroundings are filled with with high school dropouts? In effect, they will be forced to hire lower-skilled employees because they can't afford the expensive personnel searches that larger corporations can. The staffing of lower-skilled employees will likely inhibit their growth. This low skilled labor environments also means that large corporations are not as likely to move their operations to those communities. They would be unable to obtain enough skilled laborers willing to make the commute. This combination could create a "dead zone" where there is little economic growth either from inside or outside i.e. small local businesses growing or large corporations coming in.

     So what does this mean to those local businesses? In short it means they should take interest in the education that is occurring in the communities they will be hiring from. Local businesses and school districts need to be involved in a two way dialogue that starts with the question "What can I do for you?" They need collaboration.

    Two schools come to mind for me when I think about this type of collaboration: Robert A. Taft Information Technology High School & MC2 STEM High School. Those schools  have partnered with

Robert A. Taft IT High School

Cincinnati Bell and General Electric, respectively. While GE's partnership is quite a bit more extensive than Cincinnati Bell's (part of the MC2 STEM H.S. is inside of GE's campus) they are quite similar in many ways. Both companies are providing their high schools with invaluable resources like dedicated tutoring & mentoring program and internships that could offer the students a direct path into a full-time job, In GE's case there are even content  instructors for MC2's project-based learning.

    These partnerships are just a small part of the greater solution to educational inequity that needs to being corrected in all of our communities. Consider that after MC2 enacted their partnership with GE, the graduation rate has almost tripled from 31.1% in 2003 to 91.4% in 2010. Partnerships create opportunities for educational growth that otherwise would not be available to underprivileged  students. So if you run a local business in your community or know somebody that does, it can't hurt to start the conversation. Who knows, it might help your city grow.

Tootsie Roll (Industries) I Think I am in Love with You!

Tootsie Roll Industries:

Not as Sweet as I Thought

    Initially I had thought that Tootsie Roll Industries (NYSE: TR), the maker of many popular candies such as Tootsie Rolls and Pops, Caramel Apple Pops, Double Bubble, and 21 other brands, was going to be something Warren Buffet would be proud to invest in (even though he already owns See's Candies)...Profitable and growing at a slow and steady pace. To some extent that is true, if you take into account a time period from 1978 through today which gives you a return of 15,317% (excluding dividends). This exceeds the 1,916% return of the S&P 500 (index which tracks the top 500 public companies), and also trumps their leading competitor, Hershey (NYSE: HSY), 10,994%.

TR vs. HSY vs. S&P 500 1978-Present

However, over that time period TR has acquired numerous confectionery companies and hasn't developed an in-house candy in a while. Organic developments, innovations they develop in their own company, usually cost them less and show that they are dedicated to innovation.  In large part their rise in share prices correlate with their acquisition of other companies which allows them to inorganically increase their revenue.   

Although that recap is from the past, it gives you a historical analysis to help create projections for the future. TR’s last acquisition was Concord Confections in 2004, and the share price has only risen 23% since then. While I haven't dug into the weeds on it, I don't foresee any new acquisitions or major developments in future product lines. This I believe is jointly due to a small market share owned by TR, and their lack of extremely popular products other than the Tootsie Roll and TR Pops. This leaves the burden of creating increases in revenue solely up to the growth in candy consumption in the U.S. (the majority of sales occur there) and their ability to market antique candy brands. It also leaves the increase of net profit to commodity prices and business efficiency improvement. While these are very important areas to improve on, the candy industry itself just took a PR hit when the U.S. Government released new health guidelines for sugar intake that demonize the candy and junk food industries. The recent increase in urgency for U.S. citizens to be more health conscious doesn't help TR increase their revenue either.

64 Million Tootsie Rolls are made a day

The past five years, however, have had a positive impact on the company- but not because of an increase in revenue, rather, because of an increase in profit margin that has been driven by business efficiency improvement and a significant drop in commodity pricing (sugar, corn syrup, cocoa powder, edible oils, and packaging). This increased their earnings-per-share, which made the company very attractive to investors. However, the company has negligible control over the price of these commodities, and if they go up their profit margins will be hurt substantially.

 
Should you take a bite of Tootsie Roll Industries? No. The growth prospectus of the candy industry is moderate, if not poor. If commodity prices rise the EPS will fall, and in the past several years their largest quarter for revenues (Halloween) has decreased, and overall revenues have been flat. If you invest now you are leaving your gains primarily up to the prices of commodities, which rarely proves to be a good idea. I would suggest staying away from the candy industry as a whole. But if you really have to cure your sweet tooth, I would look for a company that is attempting to adapt to current industry trends. It tells you that they are interested in increasing profits through something they can control and not leaving it up to commodity prices. Check out more diversified companies like Hershey, Nestle (VTX: NESN), or Mondelez (NASDAQ: MDLZ) for better prospects in the confectionery industry.

One of The Best and Most Boring Investments You Never Thought Of

Trucking

     That computer you are looking at, that desk it is laying on, that chair you're sitting in, and those clothes you are wearing were placed on a truck and shipped to where you bought it from. Oh, and all the resources it took to make it's parts were shipped to a factory to be made then shipped to another factory to be assembled even before it was shipped to where you bought it from. Think of how many different points of shipping there are for everything that you used today...yeah, it's a lot. 

     Trucking is one of the biggest industries in the U.S., and is estimated to be worth about $700 billion a year (4% of the United States' GDP) and creates about $39 billion in highway and diesel taxes which help maintain our nations infrastructure. The industry employs about 7.1 million people with 3.4 million actually being truck drivers. All those employees are employed by 1.2 million companies and roughly 90% of them operate with 6 or less trucks.

One of Old Dominion's 222 service locations

     How do you invest in this $700 billion dollar industry? There are several ways, trucking companies, logistics companies, and the companies that make those trucks or the parts for them. Trucking companies have the poorest margins out of the three but make up the majority of the industry's revenue, the poor margins are due to the expenses of fuel regardless of the current cost of oil. But a few companies are good at making the best out of this scenario, one of the best being Old Dominion Freight Line (NASDAQ: ODFL).

     Old Dominion is one of the stand outs among all the other public trucking companies. In a sector that struggles to have high single digit margins it has advanced it's margins into the double digit territory with a Q3 15' margin of 10.82%. Old Dominion's closest competitor is Knight Transportation (NYSE: KNX) with a 10.24% margin, but Knight has half the revenue showing Old Dominion's ability to be a larger company while keeping margins higher. One may argue that Knight does pay a dividend which may make it more attractive but it is a mere 1% payout. I would rather see a company use that money to try and capture a larger percentage of the market share, especially since ODFL only owns about .39% of the shipping market. Old Dominion has a positive future because our economy is based on consuming, the more consuming, the more shipping, the more business for trucking and hopefully Old Dominion. Old Dominion is slightly over valued with a P/E of 16. I would recommend waiting until it becomes fair or undervalued  to start a position with Old Dominion.

U-Haul's Various Rental Options

     Our next company is a bit of an out-liar in the trucking world, Amerco (NASDAQ: UHAL) is the parent company of U-Haul self storage and moving trucking rentals. They are also somewhat of a cheater in this sector because they also own Amerco Real Estate Company (commercial real estate), Repwest Insurance (insurance for U-Haul customers), and Oxford Life Insurance. This company has taken the two biggest cost factors in shipping, fuel and employees, out of it's business model.  With those costs gone they can now reap much larger margins than other trucking companies, they had a Q3 15' margin of over 19%. While one would think the insurance and real estate business helps with this, it does, but Self Moving rentals amounted to about 70% of total sales. In past studies the average american moves about 11 times, given this statistic and an increasing population, Amerco has a positive future. And if for some reason moving starts to decrease there are additional revenue streams that can help offset lower moving rates. Amerco is also slightly over valued and someone looking to start a position in this company could benefit from waiting for a better value to enter into a position.

Cummins' Global Footprint

     The company that powers a large part of the trucking industry is Cummins (NYSE: CMI). If you look into it, right away there is a glaring problem, a slowing global market has negatively impacted the revenue of Cummins. While North American segments are growing (4%) all other global
segments besides India are decreasing (-18%), fortunately for Cummins they are heavily weighted towards the North American segment (60%). They have also taken action to help offset their loss of revenue in foreign markets, specifically, laying off 2,000 of their workers. Currently Cummins has lost over 45% of it's share value and has a P/E of 9.1. They also have quite a solid financial status, small amount of debt, plenty of cash to continue paying dividends of 4.58% and a new $1 billion share repurchase plan. Global markets will not always be in a slump and Cummins engines and products are not going out of style. With a long term positive industry outlook, good financial status, and great value Cummins presents itself as an addition to your portfolio.

     With several options to choose from you are presented with "which company has the best long term capability for return?" I  believe the cheater wins in this battle, while U-Haul isn't your typical trucking company they have flourished in the world of moving "stuff" from one spot to the other. Their business model is not going anywhere soon and as long as the population increases and people continue to move throughout their life they will continue to profit.

Steadfast Investment Strategy

The Steadfast Investment Strategy

            The Steadfast Investment Strategy is based off of my very short time as an investor, it will probably change as I grow as an investor. I started its development about 3 months before my 25^th birthday and its creation was spurred by my lack of something solid to base my purchases off of. We don’t have photographic memories so we cannot remember why we made every single trade. If we can’t remember why we made that trade a few months ago we might make mistakes and lose some of our money or even worse make a wrong decision.

            I dislike numbers and analytical investing but just this one time (definitely not the last) I will use numbers. The final grade of buying, holding, or selling will be based off a numbers system where I have assigned each sector of my investment strategy a number scale of 1-5 and the scale is as follows: 1= Strong Buy, 2= Buy, 3= Hold, 4= Sell, 5= Strong Sell. Each sector “should” be evaluated separately to omit one sector giving bias to another, which would effectively skew the final grade. Think of it as you are solely basing your purchase of this investment off of the sector you are currently evaluating.

1.     P/E- Find value in the investments that you are making. This is a far reaching term depending on how one might value a company (i.e. adding in potential for future earnings), so let’s put a number to it. Historical market P/E ratios are around 15-25, which is based off of money that the company has already successfully earned, not what it MIGHT earn. P/E ratios will rise when the market thinks that its future (unproven) earnings make that company worth more than it is intrinsically valued at. While it is not a horrible practice to purchase companies that have higher than normal P/E ratios it is a practice that is accepting much more risk because of the unproven earnings. Higher P/E ratios also signify that other investors have already seen value in said company and their interest and subsequent investments have jacked up the price of that investment. So sad, too bad, you missed that opportunity but thankfully there are close to 4000 actively traded companies in the U.S. I would be willing to bet you could find another value company before everyone else does, which is the goal of investing.
     To assign actual values let’s use this model for now: 1= 8-10, 2= 10-15, 3= 15-20, 4= 20-25,5= >25 & 0-8. Now you might be wondering why the value of 5 encompasses two ranges of P/E’s. I do this because there is a certain point were a P/E that is low enough might signal the weakness of a company to earn any revenue at all. In assigning a value of five for the 0-8 range I will in turn hope to shield potential investors from any truly un-valuable companies.  However, with everything there is an exception, the market may truly have missed out on a company however unlikely that is and its P/E might fall in the less than 8 range. I am not saying don’t read into it but if you do make sure you spend some time looking at their income statements to ensure they actually do make money.

2.     Dividend %- What better way to increase your portfolio than to get paid for owning a small percentage of a company! This is where dividends come into play, but buyer beware not all dividend paying companies are equal. Some companies will increase their dividends to make themselves a bit more attractive to investors solely based on their dividend and not their business practices. While dividends directly give value back to the shareholders sometimes there are better ways to do so especially if it helps increase the valuation of your company i.e. spending money on research & development (R&D). In short we want that company to be returning value to the shareholders as effectively as possible wither it is through dividends, R&D, or both.  

     For now we shall use this model to assign actual values. Our median value will be based off of long term inflation averages that are around 3%, plus one percent to ensure that a gain is realized. Making our final median value for inflation of roughly 4%. Our ranges will be: 1= 6-7%, 2= 5-6%, 3= 3-5%, 4= 2-3%, and 5= 0-2% or >7%.

3.     Dividend Consecutive Increase- While a company returning value to their shareholders through dividends is awesome, what’s even better is a consecutive increase over an extended period of time.  Say Santa brings you a lump of coal every year but one and that one year he actually gets you that Red Ryder BB gun, I guarantee you are still going to hate Santa. Then why would you invest in the North Pole Manufacturing when it pops up on your investment radar? Now if Santa brought you a few toys on your first Christmas but increased his gift giving every year until you got a Red Ryder BB gun you just might buy a stock in North Pole Manufacturing.

     For now we shall use this model to assign values. Our base value will be fashioned from our long term holding idea that we should keep a company for at least 3-5 years. Our ranges will be: 1= >20 years, 2= 15-20 years, 3= 10-15 years, 4=5-10 years, and 5= 0-5 years.

4.     Dividend Payout Ratio- Dividend payout ratio is in short the amount paid out in dividends per share divided by earnings per share. This ratio is a bit less used possibly because a lot of stocks aren’t really deemed “dividend stocks”. But if you are hunting dividends then this is something you should analyze. If a company has been issuing dividends for quite some time their payout ratio might be significantly higher than one that has just started to and vice versa. In this case high and low payout ratios may be dependent upon the length of a stocks dividend history.

     To analyze the dividend payout ratio we will have to specify if the company is “young”, “maturing”, or “mature”. First let’s start off with stocks that have a young dividend history. In this strategy we will define “young” as 5 years or less, “maturing” as 5-15 years, and “mature” as 15+ years. For these young stocks good ratios will be much lower than mature ones and if it has a high ratio you should be worried about its ability to sustain that ratio. For now we will use this model for young stocks: 1= 0-25, 2=25-30, 3=30-35, 4=35-40, and 5=40-100. For maturing stocks good ratios will be in the mid to lower ratio range. This should signify that the company has been able to effectively maintain a dividend through an extended period (5 years) and increase the amount of money it gives back to shareholders without hurting the business. For now we will use this model for maturing stocks: 1=25-30, 2=30-35, 3=35-40, 4=40-45, 5=1-25 & 45-100. For mature stocks good ratios will be in the mid to high ratio range. This signifies that the company is near its peak of increasing its payout to shareholders and has successfully increased its payout without hurting its business. For now we will use this model for mature stocks: 1=45-55, 2= 35-45 & 55-65, 3=25-35 & 65-75, 4=15-25 & 75-85, 5=0-15 & 85-100.

5.     Net Profit Margin by %- As we look at a company’s income statement we see all these separate figures that we can quantify like revenue, gross profit, operating profit, and net income from continuing operations. But at the bottom of the line we will always see Net Profit which gives an overarching idea of how much money a company is making or losing.

     While we could focus on the specific dollar amount the company is making that does not help us very much in our evaluation. This is because larger companies will inevitably sell much more than smaller companies. We will look at the net profit margin as a sign of how well the company is ran by its management i.e. are the operating expenses too high for the company to be profitable compared to other companies.

     Our period for which we will assign values will be our holding period which is 3-5 years. The mid-range we will use will be based off of an average of 5 year averages from leading companies across 31 different industries, I found these averages on 16/JAN/15. The final 5 year average we arrive at is 10.04% for these purposes I will round down to 10%. Remember this is an average of 31 industries that vary from 27.1% (real estate) to -1.1% (metals & mining) and net profit margin is only a small part (but integral) of a wide ranging analysis.

For now we shall use this model to assign values. 1=16-20%, 2=12-16%, 3= 8-12%, 4= 4-8%, 5=0-4%. Any values exceeding 20% will still be equal to a 1 and any values below 0% will still be equal to a 5.

6.     Net Profit Margin Increase by % (4 year)- While having a good profit margin is an adequate part of a productive business we never want to settle for what we did last year, we want to continuously improve our business. This means we should look at the increase of net profit margin. This will show us the dedication of management to the streamlining of their business model.

To find our mid value we will take the same approach as net profit margin by %, meaning using values from each of the 31 industries and averaging them to find one specific value. However Net Profit Margin Increase by % is not a common statistic used by investors, to find it we will find the net profit margin increase by % from 2010 to 2013 in one company from each of the industries. The average we arrive at is 3.01290323% rounded down to 3% to make it easy on us.

     For now we shall use this model to assign values: 1=4-5%, 2=3-4%, 3=2-3%, 4=1-2%, 5=0-1%. If it falls below 0% then it will be assigned a value of 5 and if it falls above 5% then it will be assigned a value of 1.

7.     Interest Coverage Ratio- Most companies don’t fully use organically generated cash flow to finance business activities, on the contrary companies will usually take out loans to finance a R&D project, business expansion, or acquisition of another company. This obviously creates a liability that the company must pay off. Interest Coverage Ratio is a metric used to see how able a company can pay it’s interest on it’s debt. Not being able to cover the interest on your debt is the easiest way for a company to go into debt.

     The bare minimum that a company must maintain in ratio is 1 meaning they can pay the interest once over anything lower than that and they risk bankruptcy. A generally accepted minimum that is “okay” is 1.5 meaning they can pay it once over and still have revenue left to finance business activities. But we are not looking for companies that are shooting for the generally accepted minimum, that is why 1.5 will not be our mid ground but our bottom of the scale, a 5 to be specific.

     For now we shall use this model to assign values: 1=3.5-4, 2=3-3.5, 3= 2.5-3, 4=2-2.5, 5=1.5-2. If an interest coverage were to fall below 1.5 it would equal 5 and if an interest coverage were to fall above 4 it would be equal to a 1.

8.     5 year Revenue Growth by %- (7.76%) While I think Net Profit Margin Increase is one of the best ways to discover if a company is effectively managed it isn’t the only way. A company can only decrease operating costs to a certain point, revenue however in theory could see endless growth. Another way to evaluate management is through revenue growth and specifically a long term look at that, let’s say 5 years. We look at longer term growths because it shows a true perspective of dedication from management to bettering their company. This is opposed to short term (quarter to quarter/year to year) flukes that may be due in part to price fluctuations or other uncontrollable factors.

     All industries will have different averages of revenue growth due to economic factors that are largely uncontrollable by businesses. However to put every company/industry on level playing ground I averaged out all industries 5 year Revenue Growth by %, my final percentage was 7.76%. Because we shoot for excellence in the Steadfast Investment Strategy lets round up to 8% and make it our median value.

     For now we shall use this model to assign values: 1=12-15%, 2=9-12%, 3=6-9%, 4=3-6%, 5=0-3%. If a 5 year revenue growth were to fall below 0% it would be ranked as a 5 and if it were to fall above 15% it would be ranked as a 1.

Part 2

            There are plenty of things in the investing world that you can’t quite put a number to but still mean quite a lot in valuing a company like their Leadership, future earnings potential, and Industry growth. In this portion of the Steadfast Investment Strategy I will put a number to these so that they can be incorporated into the framework we have already put forth. Reader beware this section is much more susceptible to emotion and personal bias than the later.

9.     Leadership- One of the most important ones is the leadership of a company specifically their CEO. Some people may completely disagree that a CEO can only have a certain limited effect on a company’s performance and that a company could probably operate without one. This statement may be true but as long term investors we are not looking for companies that simply just “operate” we are looking for companies that flourish in the long run. Companies do not flourish without somebody to give them a path to move along, goals to accomplish, and inspiration on the way. These CEOs can also identify great leadership in others and are able to build a team around them that can help the company flourish as well. They also are not limited to improving their company, they also want to improve the community that they live in or even the world through volunteering and philanthropy.

For leadership we are going to identify 5 specific characteristics that a CEO should have or be implementing at the company he runs. 
1- CEOs background in the industry that he is involved in, did he work in relevant roles before he became CEO of the evaluated company. 
2- Is the CEOs education in a relevant area that is applicable to his industry that he is operating in, this is regardless of the level of the degree (bachelor’s or higher). 
3- CEO is involved in his community and/or philanthropic ventures. 
4- The CEO is innovative making the company a disruptive force in its industry that it operates in.   5- The CEO is not a figurehead, he is a leader, he engages his workers, is open to their suggestions, and lets his shareholders know where the company is at and where it is going in the future good or bad. 

     To quantify these aspects in our framework for evaluating companies we will us this model: 1= All five traits are embodied in the CEO, 2= four of the five traits are embodied by the CEO, 3= three of the five traits are embodied by the CEO, 4= two of the five traits are embodied by the CEO, 5= one of the traits are embodied by the CEO, this category also includes zero traits.

10.  Industry Growth Potential- While there are people and companies out there that have the sole purpose of evaluating industries and their growth potentials for the most of us that is not our job. A good investor will also know that this is in the future which means it is bottom line uncertain to happen even if the smartest people say it is. The best we can do with “potential” or “forward” earnings is an educated guess that at best is usually close to being correct.

     However as a long term investor we just want to look for growth and not necessarily specific numbers. This portion of the strategy will indeed require more in depth analysis than with looking up a company’s P/E. You will have to analyze broad market trends and be able to link them together to formulate your opinion of said Industry Growth Potential. For example we can look at Aluminum, factors that you would need to include are the price of Aluminum, growing uses for aluminum, industry advances in the production process of not only the Aluminum itself but it’s applications, and the list goes on.

     The way we will evaluate this portion is through putting a number to our opinion of the growth potential. For now we will use this model: 1= Very Strong, 2= Strong, 3=Moderate, 4=Weak, 5=Very Weak. Our mid-range is moderate because generally industries will grow based simply off of the continuous growth of an economy, economies may slow their growth but generally do not shrink.

11.  Future Earnings Potential- Future earnings potential will be largely based off of the industry’s future growth. However it is not solely based off of this, a company’s ability to manage itself, adapt to a changing industry, and to innovate will also largely effect its future earnings potential. A company could be in one of the hottest industries around but with bad management that can’t capture part of that industries growth the company will flounder.

     Just like Industry Growth Potential we will have to rely heavily on our ability to link seemingly unrelated figures like commodity prices, industry growth potential, management effectiveness, marketing campaigns, product innovation, etc. together in order to determine a broad future growth analysis. It won’t be easy or quick but it will be quite worth it. Effectively predicting a company’s earnings potential will give you quite the leg up on everyone else.

     For now we will use this model: 1=Very Strong, 2=Strong, 3=Moderate, 4=Weak, 5=Very Weak. Just as industries will generally grow with economies so will companies with their industries. Companies don’t usually have management that wants the business ran into the ground. Growth will normally occur but is just a matter of how much. 

To be Continued....

Don't forget to check out my Facebook page for other tidbits of information, The Steadfast Investor. 

The Good, The Bad, and The Ugly: Cheap Oil

The Good, The Bad, and The Ugly: Cheap Oil

            Well we have wanted lower gas prices for quite some time now, probably dating back to late 2008 after they started recovering after the financial crisis. Back then the price dropped because of risky commodity trading followed up by an imploding financial world. Today I would be willing to bet it has come on the heels of our home grown oil boom. Bad thing? I say nay, but it is possibly too soon to tell. In spite of that let’s analyze the good, the bad, and the ugly in this oil crash.  

            The worst news will only get better with time so let’s start with the ugly first. The drop in oil prices will stifle the exponential growth in the U.S. oil boom. There is always a price point in oil where it is no longer profitable to extract it, refine it, and sell it, it all depends on the type of oil being extracted, and what method it is being extracted with. Unfortunately for the U.S. our price point is quite high sitting anywhere form $50-$70 compared to OPEC’s lowest of $4-$6 (Saudi Arabia). We are already catching wind of Oil producers cutting back on investments to hedge future losses of profitability because of this drop. British Petroleum (NYSE: BP) is even spending money in hopes to save money in the future by using $1 Billion to restructure their company.

If oil prices drop further U.S. companies will be forced to cut back on investments, this would put a damper on solid U.S. economic growth that we have been calling for. If the price goes lower and stays that way some companies might be forced to sell off assets and/or go out of business. Jobs will be cut, research and development will be scaled back, and exploration will slow all to save money. This could cause quite the ordeal in the U.S. possibly creating another recession. Would it destroy U.S. oil production? No, but it sure would hamper its growth.

            The bad is not really all that bad, at least for us that is. A lot of people more than likely lost money on this price drop, not just the oil companies, but people that trade oil as a commodity or the company’s stocks. They panicked when the price of oil dropped and sold off their assets to prevent incurring and further losses. While losing money is a common occurrence on Wall Street it prevents these companies from putting those profits back into the market possibly stifling growth further. And as long as those losses are not cripplingly large it won’t hurt the common consumer all that much.

            The good is actually linked closely to the ugly and the bad in this case as is often in crashes that occur in the market. What makes this crash more exciting than many others is that if done correctly Investing in the Oil Industry can be very profitable. The environment right now is very comfortable to make an investment in an oil company. This crash offers many companies at a largely discounted rate such as Devon Energy (NYSE: DVN) down about 25% from about six months ago. Many of these companies also offer a very attractive dividend sometimes approaching the 6% range as is the case with British Petroleum (NYSE: BP). Remember be greedy when others are fearful, but don’t let your greed blind you from conducting proper research on the investment you are making.  

            Will oil prices continue to drop? I could not really tell you, but if they do it will create an even bigger discount for those established oil companies that can weather this storm. You will never time the market correctly but if you never take the time to make the investment you will miss out on it. And if you decide not to invest in this value you will at least be saving money at the gas pump. 

5 Basic Investing Tips

How To Make Your Money Work For You: Let It GROW!

            These are not really in any order you can use them as you see fit, or not at all. And actually I would prefer that you formulate your own investment strategy. However they may serve as a starting point of your own formulation.

1.   “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffet. When others are taking ever increasingly risky means of gaining wealth you should be fearful of the stability of the market. And when everyone is afraid that the market is plummeting be greedy. Mr. Buffet is not telling you to time the market here nor is he specifically saying divest or invest when the market is way up or way down. He is just telling you to analyze market environments in order to receive the best value that you can when purchasing.

2.   Shop for investments like you would shop for a new car. You would never buy an unsafe car, so why would you buy an unsafe investment. What I am saying here is do your research. You spend countless hours and trips to different car lots to buy a vehicle that can potentially impact your future. Investments have just the same impact on your financial security as cars do with your physical security. Spend the time to find that investment that will get the 5 star safety rating of Wall Street.

3.    Every day is Black Friday in the stock market. You can always find a deal when looking for investments, you just have to be willing to dig for it and sometimes wait for it. A great example is the bear market from 2007-09 if we pick one stock, let’s say Ford (NYSE: F) and bought a modest $100 worth on 24/NOV/08 when it hit it’s all time low of $1.01 and forgot about it until now 17/DEC/14. If we sold ford today we would net $1375 after taxes for a gain of almost 1,400%! While I can’t tell you what investment will be the black market deal today I can tell you if you don’t search for it you will never find it.

4.   Don’t cut down what you are growing! If you keep eating your harvest your garden will never grow into a full blown farm. Same goes with investing as does gardening, if you keep spending your growth and don’t add it back to your principal investment, that first seed that you sowed, you will never grow it into a 1,000 acre farm. Reinvest your dividends, reinvest your stock sales, and reinvest surplus income. The more you put into it the more you will get out of it when it is time to harvest your growths.

5.   Taxes were created by the devil, don’t give him more than he deserves. Yes your investments are taxed too! And no the government isn’t the devil but to maximize your gains you should familiarize yourself with the U.S. tax code regarding investing. By doing the research you can easily increase your profit while investing. While the U.S. tax code is upwards of 70,000 pages, the easiest way to increase profit margin is waiting. If you simply hold an investment for at least 1 year the tax on your gains from investing will decrease. If you want to do your part in sticking it to the man then just wait it out a bit.

   If you want to be successful in the world of investing put the time in to educate yourself about it and what you are purchasing. Being patient will pay off in more ways than one. Let your garden of investments grow unimpeded by your own greedy fingers and water and fertilize it often. Only time will tell if your garden will grow into a full-fledged farm.