It is time to take profits in silver, reduce your exposure to the iShares Silver Trust (NYSEARCA:SLV) 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 SLV has been on a tear over the last year. I believe the SLV is a crowded trade and is overbought. Consequently, it's time to take money off the table, because the rally in silver has gone too far, too fast. With the European sovereign debt debacle implosion eminent, the dollar will strengthen and subsequently reduce the value of silver. It is only a matter of time before the SLV breaks down and substantially corrects. The last time silver went to $50, it was back down to $5 in a matter of a couple of years.
iShares Silver Trust Review
The objective of the investment is to reflect the price of silver owned by the trust less the trust's expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver. Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market.
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 (NYSEARCA: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: Bristol-Myers Squibb Company (NYSE:BMY), Eli Lilly & Co. (NYSE:LLY), Colgate-Palmolive Co. (NYSE:CL), MasterCard Incorporated (NYSE:MA), Priceline.com Incorporated (NASDAQ:PCLN) and Accenture plc (NYSE:ACN).
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. (Click tables to enlarge.)
Bristol-Myers Squibb Company, a global biopharmaceutical company, discovers, develops, and delivers innovative medicines that help patients prevail over serious diseases. The company is trading on par with analysts' estimates. Bristol-Myers Squibb has a median price target of $32 by 17 brokers and a high target of $39. The last up/downgrade activity was on Mar 31, 2011, when Jefferies downgraded the company from Buy to Hold.
Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. The company is trading on par with analysts' estimates. Colgate-Palmolive has a median price target of $91 by 15 brokers and a high target of $101. The last up/downgrade activity was on Apr 29, 2011, when Deutsche Bank upgraded the company from Hold to Buy.
MasterCard Incorporated, together with its subsidiaries, provides transaction processing and related services to customers principally in support of their credit, deposit access, electronic cash and automated teller machine payment card programs, and travelers check programs. Its payment solutions include payment programs, marketing, product development, technology, processing, and consulting and information services. The company is trading below analysts' estimates. MasterCard has a median price target of $372.50 by 26 brokers and a high target of $408. The last up/downgrade activity was on Sep 16, 2011, when Robert W. Baird downgraded the company from Outperform to Neutral.
Priceline.com Incorporated, together with its subsidiaries, operates as an online travel company. The company is trading significantly below analysts' estimates. Priceline.com has a median price target of $667.50 by 18 brokers and a high target of $735. The last up/downgrade activity was on Sep 9, 2011, when Wedbush initiated coverage on the company with an Outperform rating.
Eli Lilly and Co. develops, manufactures and sells pharmaceutical products worldwide. The company is trading on par with analysts' estimates. Eli Lilly has a median price target of $35 by 13 brokers and a high target of $43. The last up/downgrade activity was on Aug. 10, when Argus upgraded the company from Hold to Buy.
Accenture plc operates as a management consulting, technology services and outsourcing company. Its management consulting services include customer relationship management, finance and performance management, process and innovation performance, risk management, strategy, supply chain management, and talent and organization performance services. The company is trading below analysts' estimates. Accenture has a median price target of $64 by 17 brokers and a high target of $71. The last up/downgrade activity was on May 16, 2011, when UBS upgraded the company from Neutral to Buy.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LLY, BMY, CL, ACN, PCLN, or MA over the next 72 hours.