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Steve Reitmeister
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I am the Executive VP of Zacks Investment Research in charge of Zacks.com and all its services for individual investors. I have a top down investment approach with a focus on value and upward earnings estimate revisions. And there is nothing I enjoy more than sharing insights with fellow investors.
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Zacks.com
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  • 31 Years of Investing Wisdom in 5 Minutes
    Let’s flash back 31 years ago to a brokerage office in Merrillville, Indiana.
     
    There you will find a young Steve Reitmeister doing a summer job for his father. Sure I was trying to earn extra spending money. But, more importantly, I was a budding young capitalist eager to learn about investing in stocks. So who better to learn from than my father, a seasoned Certified Financial Planner.
     
    So dad pulls out the, seemingly 50 pound, hard copy Value Line Investment Survey binder. He reviews the basics with me. Such as understanding that owning stocks is about taking an ownership stake in the company. And the healthier the company and the more earnings it generates the higher the stock price will go. He then leaves me for a while to do some research on my own. 
     
    I was immediately drawn to the valuation section for each stock. In my mind it made no sense to buy a stock that they only expected to go up 30-50% when some had the potential to go up 100, 200 even 300%.
     
    My Dad tried to explain to me that they are discounted for a reason. Most of them were troubled companies producing poor earnings reports and suffering from declining stock prices. This made them risky investments and perhaps should be avoided.
     
    No matter how hard he tried I could not be swayed. I wanted the chance at the higher potential return. Right then and there, it was clear I was a turnaround investor.
     
    The story since then is one of some glorious successes (buying Amazon (NASDAQ:AMZN) at $8.50 and Priceline (NASDAQ:PCLN) at $25 after the internet bubble burst). But also a story of some shocking failures (watching shares of @Home and CMGI go from bad to non-existent).    
     
    So the purpose of this article is to share some lessons learned over these 31 years with other investors who enjoy the thrill of profiting from a great turnaround story.  
     
    Lesson 1: Why Pursue Turnaround Stocks?
     
    There are many ways to invest successfully. Yet the appeal of the turnaround is broad based. That’s because no one will pat you on the back for buying an obviously good stock like Apple (NASDAQ:AAPL) at $250 and selling it for $300. 
     
    The joy of the turnaround story is that it’s often a discarded or unknown stock that no one else wants to touch. And when it goes up you get great satisfaction in the “I told you so” moment when you share the story with others (Many of whom didn’t take your advice in the first place. Shame on them ;-)
     
    But more importantly, there is great satisfaction in the outsized returns that occurs when you guess right on a previously neglected stock. And that is the best reason of all to actively seek out these turnaround candidates.
     
    Lesson 2: Wait for the Proof
     
    The one thing that all my turnaround failures have in common is that I got in too early. Meaning I was buying in on the way down, hoping and praying that the turnaround would take place. Too often the turnaround did not materialize and my hard earned money was washed down the drain.
     
    So the key is to have the patience for the company to show you undeniable proof that the turnaround is occurring. The clearest form of proof is when the company delivers a big positive earnings surprise that Wall Street analysts fawn over with greatly increased earnings estimates for the future.
     
    Yes it’s true that the stock will jump on that news and you will not grab the stock “exactly” at the bottom. However, your entry point will be plenty low in the grand scheme of things. Plus you have now GREATLY increased your odds of being in a winning and timely trade.
     
    Lesson 3: Choose Growth Stocks
     
    You are bound to discover that a turnaround story can take place in any industry with companies both big and small. However, the best returns will come from buying the stocks that have the highest growth rates. That is because once the turnaround takes place the PE will start to rise from abnormally low levels. The higher the growth rate of the firm the more the multiple will expand and the greater your final return.
     
    My two previous success stories of Amazon and Priceline prove out my point. These stocks are up 2000% and 1500% respectively since I bought them nine years ago. That’s because they are still experiencing the phenomenal growth associated with being internet ecommerce leaders. However, we all know I would not have fared as well if I invested in more pedestrian stocks like a phone company or bug exterminator.
     
    Long story short…focus on growth stocks for the best turnaround profits.
     
     
    Lesson 4: Don’t Forget Value
     
    Not every stock whose price has gone down is a bargain. That is become stocks have so much premium in their share price that it takes a long time to squeeze out the excess after the bad news hits. For other companies it’s not really a bargain because future estimates keep slipping faster than the share price decline thus making the PE actually rise.
     
    Given the increased risk inherent in turnaround plays means that you should be buying at a discount to peers to make it worth your while. PE, PEG and Book Value are all useful tools. But certainly consider the lesser used Price to Sales ratio which quite often unveils the best opportunities.   
     
    Closing Comments
     
    All of the above advice will help you select more stocks that will be turnaround winners. But even if you followed every lesson to the letter you’d still discover that this is one of the riskier stock investment approaches. So do not dedicate all of your money to a portfolio filled with turnaround candidates. Better to just have two or three at a time that fit well into a well diversified portfolio.


    Disclosure: I am long AMZN, AAPL, PCLN.
    Tags: AMZN, AAPL, PCLN
    Dec 17 3:52 PM | Link | Comment!
  • Did You Pass the Test?
    The decline that started on Monday continued through the early part of the session on Wednesday. This was a further test of investor conviction. You failed this test if you sold under the pressure of such a minor pull back. You passed with flying colors if you held on and saw the nice late day rally.
     
    Simply no one knows for sure what the market will do tomorrow, next week or next month for that matter. But the further out you go, the clearer you can see what will happen because the movement of the market over time will be based on fundamentals. And right now the fundamentals are clearly improving as we can see from measures like corporate profits, GDP or even the jobs picture that is now turning around.
     
    The more we stay focused on these fundamentals the more profitable we will be. And the less likely we will be to try and figure out what the market will do in the short run. That is the toughest game in town.
     
    Turning back to the fundamentals we got a very nice Jobless Claims report Wednesday showing 435,000 new claims versus the 450,000 estimate. Better yet, this makes 2 out of the last 3 weeks coming in under 450,000. Combine this with the positive readings from the October Employment report and the dots are starting to connect towards real improvements in the job market.
     
    No, unemployment in America has not been solved. But we are starting to make a turn for the better. Every step in that direction helps the cause for economic growth, corporate earnings and stocks. And that is the fundamental reason to stay invested right now.
     
    (For more insight on the fundamental case for the stock market at this time, then check out my recent article; 4 Reasons Why Stocks Are Ready to Make New Highs)
     
     
    My Two Cents
    (During the day I read many other investment articles of interest. Here are links to some new ones with my 2 cents added underneath).
     
    Lower bond rates to raise inflation is like having a war to create peace. Because higher inflation begets higher bond rates. Seems that the bond vigilantes are on to him. Better stock up on TBT to profit as the 30 year bond rally comes to an end.  
     
    McDonalds is one of the few companies that never really got hammered during the Great Recession. Their profit growth has been steady as she goes for 5 years plus and no wonder shares keep pressing higher.
     
    Earnings estimates for next year continue to rise with many analysts calling for more than $2 per share. That means that SOL is only trading at a PE of 12. Quite modest given the growth prospects. My original position is just under $8 per share. But on this recent dip I am loading up with a bit more. I think that $16-19 is a reasonable 12 month target. (Note that some brokerage firms are looking for up to $23)
     
    For a long time the shorts were ganged up on this stock with well over 10% shares shorted. Yet quarter after quarter PCLN just kept banging out huge earnings surprises. Many shorts have thrown in the towel on the ride up from $200 to $400+.You gotta laugh at anyone still hoping for this stock to implode (just not going to happen).


    Disclosure: Of course I own shares of TBT, SOL and PCLN...or why else would I be recommending them to others???
    Tags: TBT, MCD, SOL, PCLN
    Nov 10 6:11 PM | Link | Comment!
  • 3 Reasons to Love "EER" Investing
    I wasn’t always a good investor. Over the past 30 years I’ve made just about every mistake imaginable.
    ·         Jumped in at the peak
    ·         Jumped out too late
    ·         Bought falling knives
    ·         Doubled down on losers
    ·         You name it, I probably did it.
     
    By the time I joined up with Zacks Investment Research in August 1999, I had eradicated most of those bad habits. But as Len Zacks and his brother Ben pointed out…I had a lot to learn.
     
    What they taught me is that, indeed, earnings estimate revisions (EER) are the most powerful force impacting stock prices. And nothing captures that power more than the Zacks Rank rating system as proven by its +27% per year annual return.
     
    The timing of this profound investment message could not have been better for me. As the stock market bubble popped in 2000 I started to apply this new investing approach. So even though the market tumbled that year I actually gained +16% in my personal account.
     
    Was I hooked? Heck yes!!!
     
    Each year since my knowledge and passion for this approach has grown. And there is nothing I like more than to share the wisdom of this investing strategy with others. My goal today is to spread some of that wisdom on to you so you can also enjoy great investment success in the years to come.  I’m going to do that by listing…
     
    The 3 Top Reasons to Love Earnings Estimate Revisions
     
    1)    The Most Fundamentally Sound Metric: There are so many different websites, magazines, books, TV stations etc. dedicated to investments. The amount of information overload is so unbearable that most investors walk away horribly confused about what is truly important to achieve success. So let me simplify the matter for you so you can push away all that noise and nonsense in the future.
     
    At the end of the day, all stock price movements can be traced back to earnings.
     
    Read that line again so it really sinks in. The reason it’s true is from the basic fact that when you buy shares in a company, you are actually buying a percentage ownership stake in that firm. And if you are the owner of a company, big or small, then the single most important metric to gauge success is how much earnings are generated.
     
    If profits go higher than expected, the share price will rise. Conversely if profits go lower than expected, the share price will come down as well. The stock market has always worked on this premise and it always will. And nothing captures the essence of this notion more than earnings estimate revisions.
     
     
    2)    Applies to Every Type of Investor: Because all stock price movements can be traced back to earnings, it follows that earnings should be at the heart of every investment decision. But that is not the same as saying that earnings are the ONLY thing to consider when selecting a stock. That is just the starting point. From there, each investor can layer on other concepts such as value, growth, charts etc. to find the stocks that fit their unique approach.
     
    My favorite analogy for this is to say that earnings are to stock investing as flour is to baking. That’s because nearly 100% of baked goods include flour in the recipe. What makes each item unique and delicious is the rest is what you add into it (sugar, flavorings, nuts, fruit, butter etc). Each way works out well, but each starts with flour to make it all come together. So you can apply other factors on top of earning and estimates to make it suit your unique investment tastes as well.   
     
     
    3)    It WORKS!: When you put the philosophy and analogies aside, earnings estimate revisions simply work. This is clearly proven by the market-crushing +27% average annual returns of the Zacks Rank since 1988. Through up and down markets it has provided extraordinary, life-changing results for investors. I can certainly testify that is true for me. So I know it can do the same for you too.
     
    Some of My Favorite EER Stocks
     
    On Seeking Alpha my firm, Zacks Investment Research, has created a free app for you to see how well your stocks stack up in terms of Earnings Estimate Revisions. Just to get you started, here are some of my favorite EER stocks and their ratings in the Zacks App.

     


     

     
    Get Your Own Free Zacks.com App on SeekingAlpha

     
     


    Disclosure: Why recommend stocks if you don't own them??? So yes, I own EMN, ETN and MAN
    Tags: EMN, ETN, MAN
    Oct 30 10:53 PM | Link | 3 Comments
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