It is time to take profits in gold and reduce your exposure to the Gold ETF (GLD) and buy a basket of these six stocks with great stories and positive catalysts. Additionally, these stocks are trading at a substantial discount, have above industry average returns on equity and returns on assets greater than or equal to 15% over the trailing twelve months.
The GLD has been on a tear over the last year. I believe the GLD is a crowded trade and is overbought. Consequently, it's time to take money off the table, because the rally in gold has gone too far too fast. With the European sovereign debt debacle implosion eminent, the dollar will strengthen and subsequently reduce the value of gold. With the recent parabolic move and potential margin raise, it is only a matter of time before the GLD breaks down and substantially corrects.
I have been writing about this for some time, as many of you may know. However, this time some savvy accomplished Wall Street veteran’s agree with me. Joe Terranova of CNBC’s Fast Money and author of the book “Buy High And Sell Higher” said,
If the U.S. dollar goes much higher precious metals could be vulnerable. I’d own puts.
Forget gold and Treasuries, the safe haven has become Apple (AAPL).
SPDR Gold Shares (GLD) Review
The investment seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.
Sell the GLD and buy a basket of the following six large cap or better stocks. These stocks are trading at a substantial discount, have above industry average returns on equity and returns on assets greater than or equal to 15% over the trailing twelve months, great stories and positive catalysts for future growth.
Return on equity (ROE) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are considered desirable.
ROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage; as with many financial ratios, ROE is best used to compare companies in the same industry.
High ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share (EPS), you will be paying twice as much (in Price/Book terms) for a 20% ROE company as for a 10% ROE company. The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate. The benefit can also come as a dividend on common shares or as a combination of dividends and reinvestment in the company. ROE is presumably irrelevant if the earnings are not reinvested.
The sustainable growth model shows us that when firms pay dividends, earnings growth lowers. If the dividend payout is 20%, the growth expected will be only 80% of the ROE rate. The growth rate will be lower if the earnings are used to buy back shares. If the shares are bought at a multiple of book value (say 3 times book), the incremental earnings returns will be only 'that fraction' of ROE (ROE/3).
New investments may not be as profitable as the existing business. Ask "what is the company doing with its earnings?" Remember that ROE is calculated from the company's perspective, on the company as a whole. Since much financial manipulation is accomplished with new share issues and buyback, always recalculate on a 'per share' basis, i.e., earnings per share/book value per share.
Nevertheless, these are bullish indicators regarding a stock's possible future performance. Moreover, most of these stocks are trading well below consensus analysts’ estimates. Several have recent upgrades and positive analyst comments. There may be more volatility in front of us even with the more than 10% drop in the market recently. All the same, this may be a good point to start a position in these buying opportunities. As Warren Buffett says, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
The six highly rated large-cap or better stocks are: Apple Inc. (AAPL), Microsoft (MSFT), The Coca-Cola Company (KO), Intel Corporation (INTC), McDonald’s Corporation (MCD) and Philip Morris International, Inc. (PM).
Below are two tables with detailed statistics regarding each company’s current Summary Information and Earning per Share and Dividend information followed by a brief review of each company, detailed current analysts' estimates and up/downgrade activity followed by a chart of the company's key statistics. Please use this as a starting point for your own due diligence.
Earnings and Dividend Statistics
Apple Inc., together with its subsidiaries, designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as selling related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. The company is trading significantly below analyst estimates. Apple has a median price target of $500 by 46 brokers and a high target of $666. The last up / downgrade activity was on Aug 15, 2011, when Hilliard Lyons initiated coverage on the company with a Buy rating.
Microsoft develops, manufactures, licenses, and supports a range of software products and services for various computing devices worldwide. Microsoft was founded in 1975 and is headquartered in Redmond, Washington. The company is trading below analysts' estimates. Microsoft has a median price target of $32 by 26 brokers and a high target of $36. The last up/downgrade activity was on Sep 9, 2011, when Standpoint Research downgraded the company from Buy to Hold.
The Coca-Cola Company manufactures, distributes and markets non-alcoholic beverage concentrates and syrups worldwide. The company is trading below analysts' estimates. Coca-Cola has a median price target of $77 by 13 brokers and a high target of $95. The last up/downgrade activity was on March 4, 2010, when UBS (UBS) upgraded the company from Neutral to Buy.
Intel Corporation engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. Intel Corporation was founded in 1968 and is based in Santa Clara, California. The company is trading below analysts' estimates. INTC has a median price target of $25.50 by 36 brokers and a high target of $32. The last up/downgrade activity was on Aug 8, 2011, when Standpoint Research upgraded the company from Hold to Buy.
McDonald’s Corporation, together with its subsidiaries, operates as a worldwide food service retailer. The company is trading below analysts' estimates. McDonald’s has a median price target of $98.50 by 20 brokers and a high target of $104. The last up/downgrade activity was on Aug 18, 2011, when Oppenheimer upgraded the company from Perform to Outperform.
Philip Morris International Inc., through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company is trading below analysts' estimates. Phillip Morris has a median price target of $77 by 13 brokers and a high target of $80. The last up/downgrade activity was on Jul 28, 2009, when UBS downgraded the company from Buy to Neutral.