Beating the Street

I'm new to investing and started by reading "The New Buffettology" (Clark, M. Buffett) and most recently Peter Lynch's 1993 "Beating the Street." I was enamored with Lynch's very candid perspective of his career. What I learned in a nutshell summary is this:

(1) Like sports betting, for every financial analyst saying "buy," another is saying "sell." Picking stocks can be a coin flip with the bets evening out on both sides...the surest winners are those charging broker fees.

(2) Great analysts are separated by special knowledge into a company/sector. Some of Lynch's biggest scores were from talking with a CEO over dinner and discovering something great about that CEO's competitor. Since Ellen Kullman won't be inviting me to dinner any time soon, I'll need another avenue.

(3) Absent special knowledge of a sector, we're all largely speculating on the same set of data (balance sheets, earnings history, cyclical trends etc.).

(4) Warren Buffett's principles are the most sound fundamentals to abide by for analysts who can't dine with Meg Whitman.

I'm a huge fan of Peter Lynch now. Reading his book was like listening to his career war stories over a late evening beer. Yet even Lynch admits quite candidly that he failed to beat the market during some critical upswings in the economy. So if even Peter Lynch can hit and miss, what chance does the novice investor have?

I guess I could take away the following bullet points to guide me: (1) Warren Buffett is pretty crafty. Invest in companies showing sound fundamentals and a positive, sustained earnings trend if you want to make it over the long haul (2) seek companies with powerful competitive advantages when possible (3) understand what it is you're investing in and (4) always check EDGAR...it's the closest I'll ever get to that CEO dinner table. --Schlitz

Manitowoc Co.

When you read the name 'Manitowoc' it probably looks like nonsense, but after this post I'm hoping it looks a bit more like '$$$$$$$$$' next time you see it.

Manitowoc Company (NYSE: MTW) is an industrial manufacturer that makes cranes, ships and food service equipment. The cranes are made under the names of Manitowoc, Grove, Potain, National and Crane CARE brands. Next time you are driving by a construction site having a crane on site, it is almost a sure bet that it was made by Manitowoc.

Why is this stock worthy of your attention? Easy, Obama's infrastructure plan concerning the replacement and repair of highways and bridges. Manitowoc makes the cranes needed to lift the heavy steel beams and concrete barriers needed in road and bridge construction.

Management: This is an area that I couldn't find too much info on beyond the company's numbers. Based on the company's history I'd say it is pretty well run based on posting a profit in 9 of the last 10yrs, and it is a growing company having acquired Shirke Construction Equipments Pvt. Ltd in July '07 and Enodis PLC in October '08. That said, news came down on Friday that the Chairman, Terry Growcock (yes, that's his real name), is retiring. Who is taking over and what this means for the future is still a bit of a question mark as of this posting.

Financials: As previously mentioned, Manitowoc has been profitable in 9 of the last 10yrs and has a low P/E ratio of 4.19. The stock has a 52-week high of $51.49/share and a 52-week low of $4.56/share. After crunching some numbers, I currently show a relative value of $98.58/share, an initial rate of return of 29.94% and an annual growth rate of 0.59%. My feeling on this stock is there is a ton of upside and built in value considering the price is currently at $8.75/share.

Outside Factors: Obama's infracstructure plan and low interest rates. As I already mentioned, Manitowoc builds the stuff that builds our roads and bridges. What I didn't mention though was the fact that interest rates are amazingly low right now. Despite the rough economy, this might be a good time for companies to take out loans for large capital purchases with the thinking that the economy will eventually turn around. Also, these interest rates might spur the start of some large scale private building projects which would also benefit MTW.

Performance to Date: I bought in to MTW at $7.19/share. As of this post, the stock was at $8.75/share to net a 21.7% gain in roughly 3-weeks of holding. The stock has seen prices as high as $9.88/share during the time I've owned it (37.41% gain over purchase price). I'm confident that MTW will rebound to a point closer to it's 52-week high at some point in the next 1-2yrs based on some of the factors discussed in this post. Even at $8.75/share a return to the 52-week high of $51.49/share is enough for a near six bagger! At my purchase price of $7.19/share, I'd net a seven bagger. This is a stock that I plan to invest further in over the next few months.

"How to Save the Industrial Heartland"

Interesting story on Forbes here about how to save the industrial heartland, in specific: Michigan.

"So instead of believing in reincarnation or finding some miraculous cure, Kitchens believes places must rely on exploiting their historic advantages. In the case of Michigan, those are assets like a powerful engineering tradition and a hard-working and skilled workforce that can be harnessed in fields outside the auto industry."



This article makes a lot of salient points, especially about tapping into the rich engineering talent in Michigan. In the face of panic and despair, quick fixes such as a "cool cities" initiative may seem like an apropos solution, but this is not a recipe for long term success.

Michigan needs to invest in businesses that use the talent of the people that are both displaced by the auto industry collapse and that come out of the many great universities in Michigan.

We will see whether or not a green energy initiative is a smart bet (the author thinks not), but at least it's a bet.

US Dollar Slides Again

This time urged by new record low Fed target interest rates (0.25%), the US dollar has resumed sliding steeply against foreign currency such as the Euro and Yen (vs. which it is at a 13 year low).

It seems that the Fed is more interested in artificially boosting the NYSE above a certain limit (some speculate that the government will do anything to keep it above 8000) rather than take the bitter pill of deflation (which, if prolonged has it's own serious problems).

This is certainly bad news for the US dollar (and thus the US) long term, and one can only hope that the rate cut is a temporary measure and will be reversed once a reasonable market turnaround occurs.

Desperate times call for desperate measures, some may say, but the US dollar just reeks of desperation right now.



Further reading: Bloomberg

Is that the sun I see…or are you just happy to see me?

To follow up on my previous post (see the Fast Company article here), the solar energy sector is going to be interesting from an investment perspective in the near future. Solar energy has been touted as the future of energy for some time now, but has always been relegated as a minor energy source. There are a few reasons for this, a major one being the cost for solar has been significantly higher than other sources such as coal and oil, the latter resources being extremely cheap up until the run-up in cost at the end of 2007/beginning of 2008. The second being that comparatively small sums of money have been invested in solar as opposed to oil, making it more difficult for companies to reach the economies of scale needed to really reduce the cost of solar technology. And while solar technology is a heavily subsidized industry, those subsidies are peanuts compared to those given to the oil companies, about one-twentieth worldwide according to the Fast Company article. I can’t help but wonder that if more people knew about this, they would be even more furious with the oil companies that have been taking in record profits the past few years.

Why then is solar an industry to look at now? Firstly, most of the world’s major countries (western Europe and Japan) have rules in place that require companies to get a certain percentage of their energy from alternative sources, thereby increasing the demand for solar products. With Obama coming in and stating alternative energy is a priority, the demand in the US is likely to increase. And as demand increases, larger companies will start to realize there is a profit to be made and might join in, thereby increasing competition and lowering the price of solar future. Second, as the price of oil increases (the recent drop in prices is not likely to stay; it is likely more a result of the recession, in my opinion) and the price of solar decreases, there will reach a break point where solar is equal to or less expensive (and increasing more accepted) than other common energy sources, at which solar energy usage would likely skyrocket.

So as an investor, what stocks are available to take advantage of these treads? Investors should keep in mind that over the long-term, solar energy stocks have the ability to skyrocket. However over the short term, the stocks are quite volatile. Therefore an index like Market Vectors Solar Energy (KWT), Claymore/MAC Global Solar Index (TAN), or PowerShares WilderHill Clean Energy Portfolio (PBW) would be good as a long-term investment, while companies like SunPower (SPWRA), Applied Materials (AMAT), Q-Cells (QCE), First Solar (FSLR), and Dyesol (DYE) might be good in the short term if you can get them at a good price and hope for a run-up on good news.

Side note: One should not discount the lack of acceptance of the aesthetics of alternative energy sources, and not solely the higher costs, as a major factor in why more money has not been invested in them. When the economy was booming and people were doing well, factors unrelated to the actual usefulness of the technology keep alternative sources down. How many times did you hear people filing lawsuits against wind companies for putting up windmills along the coast, claiming it ruined the view of the ocean? Or hear people decry that a solar panel is an eyesore when placed on a roof? Or that a nuclear power plant or even power lines reduce the property values? But now that people are hurting financially, I think those arguments will start to lose hold, and people will gradually accept the aesthetics of alternative energy sources.

Important additions to the site

Since starting this site about a week ago, our investment club has had some interesting goings on that we hopefully plan to turn into blog posts. We hope to include a smatteing of our goings on, while starting some interesting features that are common occurrences. The plan is to get a sector analysis going, along with detailed analysis of stocks we are considering, our watch list, our holdings, and finally tips to help start up and run an investment club. If you have any suggestions, feel free to post them in the comments section. Thanks!!!

Solar energy

Fast Company magazine had a great article in their most recent issue with regards to the various companies in the solar industry throughout the world. An interesting note is that a city near Berlin in what used to be East Germany is a major center for producing sola panels. This industry is interesting because everyone knows that we need to develop alternative energy sources in the US; Obama has said that this is one of his priorities. However with the recession, the money to do this might no be there, according to many analysts, and therefore solar energy stocks have been beaten down quite a bit recently (even more than other sticks). I hope to do a more thorough review of this industry shortly. Stay tuned.....

Caterpillar

Time for the second installment of "let's pick apart my portfolio"... this time we're going to discuss Caterpillar, Inc. (NYSE: CAT).

Caterpillar is an industry leader in heavy machinery used in the construction, mining and forestry industries, as well as being an engine manufacturer and financier of the products it sells. While the U.S. market for construction has slowed recently, CAT is a global company and has seen strong growth in emerging markets such as China. This has allowed CAT to remain profitable in each of the last 10yrs I looked at.

The primary reason I chose to look at CAT is because they build the equipment that builds our infrastructure... notice a hot trend here?

Management: While I don't know nearly as much about the management of CAT as I did about GE, I know enough to say that this company appears to be in good hands. They have a reputation of issuing dividends, buying back shares, and they have been profitable and growing over the last 10yrs.

Financials: I'll spare you from the math, but this stock appears to be greatly undervalued at the time of this blog. At the time of purchase, CAT was down to $38.45/share, while the relative value I calculated is up around $134.89/share. The 52-week low was $31.95/share and the 52-week high was $85.96/share, and I calculated an initial rate of return of 14.95% and an annual growth rate of 3.98%. While these rates weren't quite as attractive as GE's, they still looked very good to me.

Outside Factors: Once again, I'm going back to the incoming president's plan to fix our roads, bridges, and mass transit systems (although I'm not sure Detroit's People Mover or SMART Bus system really qualify as mass transit). In my eyes, this says orders for new equipment capable of upgrading these systems is coming soon.

Performance to Date: So far, nothing... I bought at $38.45/share about a week ago, and as of this post, it sits at $38.40/share. In this market, that might not be such a bad thing though. I still think this stock is poised to take off, but it may not be for a few more months, or even a year depending on how quickly things happen with the new administration.

Infrastructure stocks... you pick 'em!!!

On the heels of a more detailed plan regarding infrastructure investments to be made under the new Obama administration (http://www.nytimes.com/2008/12/07/us/politics/07radio.html?bl&ex=1228798800&en=8a47220b90bc54e4&ei=5087%0A), I've got internet, road work and dollar signs on my mind.

This leads me to my current conundrum; how and where to put money to capitalize on this plan? I've done a little looking and haven't yet found that golden nugget in the internet or road construction infrastructure areas.

Companies like Cisco (CSCO), 3-Com (COMS), Alcatel-Lucent (ALU) and Nortel Networks (NT) are all interesting, but all seem to have their own warts. Many of the cement, asphalt and materials companies like Vulcan Materials Co. (VMC), Martin Marietta Materials (MLM), Texas Industries (TXI) and Ready Mix (RMX) are equally compelling, but also have their issues.

So, here's your shot... take a stance for or against any and all of these stocks, as well as others in these sectors, and let's formulate a plan to cash in!!!

General Electric

As promised, I plan to give you all a bit of insight on some stocks of interest to me, starting with my first stock ever purchased, General Electric Company.

General Electric Company (NYSE: GE) is diverse company with business in the areas of technology, media and financial services to name a few. They make everything from aircraft engines to medical imaging machines. The four major sectors of the company are GE Technology Infrastructure, GE Energy Infrastructure, GE Capital and Corporate Treasury, and NBC Universal.

I've always heard that diversifying your portfolio was a good thing, so I wanted to seek out a company that had a diverse range of products and services to serve as a foundation to build upon. GE seem to fit the bill in that regard, so it was definitely worth taking a further look.

Management: One of the intangible factors to picking a winning stock can be the management. This is a principle that many experts preach, but few investors seem to put as much weight into as they probably should. In the case of GE, they have a strong reputation for building strong management from within. From their long time CEO, Jack Welch, to their current CEO, Jeffrey Immelt, GE has a reputation of being a well organized, well run business. The research I did on this factor was reading the book 'Winning' by Jack Welch, GE's former CEO. This book gave me a good idea of the principles management at GE use, as well as some of the overall corporate culture of the company. While I may not have agreed with everything in that book, I still came away with the feeling that GE was a well run company.

Financials: Without boring anybody to tears with too many specific numbers or equations, I researched the financial history of GE dating back 10yrs and found it to be a strong and growing company. I also found its stock to be greatly undervalued. My calculations gave the stock a relative value of $46.89, I found that it had a 52-week high of $38.52 and a 52-week low of $12.58, and the stock was selling at only $15.90 at the time. Further, I calculated an initial rate of return of 12.16% and an annual rate of growth of 8.54%. My conclusion was that this was an undervalued stock that was suffering from a poor overall market.

Outside Factors: Another point of investigation on this stock was with outside factors and trends. With the election of Barack Obama and his talk about infrastructure investment, I felt that GE might be a company that could greatly benefit if this plan came to fruition. There seems to be a bit of a wake up from America following the $4+/gal gas prices we saw last summer, and many seem ready to consider alternative energy sources. GE is poised to flourish from this shift. Any upgrades or additions to the nation's power grid or further acceptance of alternative energies such as wind/solar/water power would directly benefit GE since they are an industry leader in these areas. This sealed the decision to buy GE as my first stock.

Performance to Date: Keep in mind that this is based on roughly a week's time, but to date, my GE stock is up 12.89% from $15.90/share at purchase to $17.95/share as of this post. I'll keep you all posted over the coming weeks on any additional buying and selling of this stock, as well as its performance.

Our backgrounds

All of us have engineering degrees of various disciplines. Everyone except myself came into this with minimal experience investing, mainly in the 401k and IRAs, and had read books and various articles on the subject. I was actually a financial advisor for 4 years before my current job, had my Series 7, but did nothing with individual stock investing, focusing solely on mutual funds and a wrap account. So while I may have been able to sell stocks, I never did, and never learned the fundamentals of individual stock selection. Hopefully the rest of the club members will give their backgrounds at some point.

Why start an investment club?

The impetus for starting an investment club came in October 2008. The market was down about 30% at the time (who knew it would drop even lower) and several of us started talking more about the market and the economy in general. The idea was floated out there to start an investment club, so we looked online for some tips on starting a club, and held an initial meeting to see if it was feasible to make this happen.

Everything I have read stressed the importance of having an initial meeting to find out everyone's background, interests, and financial goals. If everyone is not on the same page, it can lead to issues down the line. People who are best friends can end up acting crazy when it comes to money. 6 people were invited to join initially, and 4 of us were able to make the time and effort commitment that would be needed to start up a club.

This leads to why we actually started the club. It turned out that all of us was really learning about investing so that we did not have to rely on someone else for advice, and are smart enough to make decisions on our own. Since we all have engineering degrees, we figured our math and analytical backgrounds would be a big benefit to us and help temper much of the emotion that so often causes people's portfolio to rise like a balloon, only to be popped and then plunge into the depths of hell (which is what is happening to many unfortunate people right now). Only time will tell if this works out, or is a complete disaster, but in the end it should be a good learning experience.

This is not to say everyone should have the same reasons for starting a club. We want to beat the market because we are cocky and think we are smart, but others might want to start a club to understand the basics of investing so as to not get swindled by someone, while others might only want a place to bounce stock ideas off other people. Whatever the reasons, if you can find other like-minded people, starting a club will probably be a good use of time.

Welcome

The goal of this blog is to detail the trials and tribulations of 4 twenty-something engineers starting up an investment club during probably the worst market conditions we will even see in our lifetime. We want to get into the specifics of how we started the club, how we run our meetings, how we pick our stocks, while showcasing what we did right, what we did wrong, and everything in between.