Tuesday, 13 November 2012

Why I remain optimistic despite the challenges ahead. Rational living applied to personal finance. What I am investing in right now. My favourite stocks in the stock market today

The levels of public debt vis-a-vis the Gross Domestic Product are worrying many investors. The public debt estimates of the International Monetary Fund released in April 2012 show the percentage per country. Investors are looking at the future, wondering what the consequences will be in the short- and mid-term for the world economy and for their personal investment portfolio.

If the public debt is paid out, at least in part, by creating new currency, inflation is the most likely result, followed by an increase in interest rates. We can find a good recent example of inflation if we look at the historical data from the US Bureau of Labor Statistics. The data show that inflation rose considerably at the end of the nineteen seventies and early eighties.

The Consumer Price Index in the US went up 7.62% in 1978, 11.22% in 1979, and finally peaked at 13.58% in 1980. Then year-to-year inflation diminished to 10.35% in 1981, 6.16% in 1982 and returned to a normal level of 3.22% in the year 1983. In parallel, the US Federal Funds Rate peaked in the same period, going above a 19% interest rate in the period December 1980 to January 1981.

Many investors fear that if we see such high interest rates in the near future, the effects will be very negative for stocks. Such fear is prompting many people to purchase gold, whose price has been sharply rising during the last two years from USD 1.400 per ounce in 2011 to the current USD 1730 per ounce.

At first sight, it is logical to expect a high interest rate to be negative for stocks, since companies will have to pay higher borrowing costs which would reduce their profitability. The risks of high inflation and the ensuing high interest rates make many investors feel pessimistic about the future, but are those negative expectations supported by historical facts?

Short-term fears can be overcome by taking a long-term view

The reason why I remain optimistic about stocks, despite the risks of high inflation and high interest rates, is because we have already gone through a similar situation at the end of the nineteen seventies and early eighties, and the final outcome was very positive for stocks. All you need to do to convince yourself is to take a look at the historical chart of the Standard and Poor's 500 Index.

Indeed, the rise in interest rates at the end of the nineteen seventies and early eighties caused a short-term decline in stocks (around 9% in the US and around 13% worldwide), but stock prices quickly rebounded afterwards and escalated to new heights in the following years. If you contemplate the S&P 500 Index chart from close, it shows a bumpy ride from 120 points downwards to 100 and then upwards to 140 in the period 1980-1982, but if you take a step back and look at the chart from a long-term perspective, the bumpy ride is almost imperceptible.

The current market continues to offer interesting opportunities for investors

When you look at today's situation from a historical perspective, you can easily see that it is not that different from what happened at the end of the nineteen seventies and early eighties. The historical data from the Standard and Poor's 500 Index give us good reasons to remain optimistic about stocks in the mid- and long-term. The historical market data show the likelihood of a short-lived 10% correction, but as a long-term investor, I am willing to take the risk of a bumpy ride in the next years.

In this context, these are some of my current ideas for my own share portfolio, with a strong preference for companies that pay regular dividends and that do not carry unsustainable debts in their balance sheet should interest rates go up to 19%. I also like companies with a well-established international presence, so that their profit and loss account can balance out the impact of inflation in different currencies.

Astra Zeneca AZN

The current price of the American Depositary Receipt of Astra Zeneca is USD 45.44, which gives a price-earnings ratio of 9.5. This major pharmaceutical company is well diversified internationally. Its headquarters are located in London, United Kingdom, and it has an operational presence in 100 countries. Astra Zeneca has a total of 57.000 employees, from which 13.000 are based in the Asia-Pacific region.

The wide international diversification means that, even if the USD lost value vis-a-vis other currencies due to inflation in the US, the currency depreciation would only affect 40% of the revenue of Astra Zeneca. The company's research and development efforts (USD 4 billion annually) are also spread in eight different countries.

Astra Zeneca's Chief Executive Officer, Mr. Pascal Soriot, has released the company's latest quarterly results on 25 October 2012. Analysts estimate the company's earnings for the year 2012 to be between USD 6.00 to USD 6.30 per share, which gives a price-earnings ratio of 7.5 at the current share price. Astra Zeneca's major sales initiative at this time is the promotion of the Amylin diabetes treatment in the United States. The current yield of the shares is above 6%.

Wells Fargo WFC

The current price of the Wells Fargo shares is USD 32.35. As the fiscal cliff approaches in the United States, some investors may panic and dump indiscriminately all their bank stocks. This would be a great time to buy shares of Wells Fargo, which are currently yielding 2.6%. Wells Fargo data from the third quarter of 2012 show the company's net income rising to USD 4.9 billion, which represents a rise of 22% compared with the third quarter of the year 2011.

The earnings per share of Wells Fargo have been growing consistently during the last 11 quarters, climbing from USD 0.82 in the second quarter of 2012 to USD 0.88 in the third quarter. As a result, analysts are expecting Wells Fargo to end the year 2012 with earnings per share around USD 3.30. At the current share price, this gives a price-earnings ratio just under 10.

Ericsson ERIC

Ericsson is a Swedish electronics company with a strong international presence. It has more than 100.000 employees and operates in 180 countries. The company's American Depositary Shares are currently priced at USD 8.79, and this gives a price-earnings ratio of 15. Ericsson employs 22.000 people in its research and development activities, and owns 30.000 patents.

The company's results from the third quarter 2012 that have been reported by its Chief Executive Officer, Mr. Hans Vestberg, show a decrease in sales of -2% compared the third quarter of 2011, but this overall decrease includes a sharp increase of 19% in the sales of Ericsson's Global Services Division. The company also reported a decrease of -7.7% in its operational expenses.

In a press release made public on November 7, Ericsson has announced its plan to cut 1.550 jobs in its central operations in Sweden in order to increase the company's profitability. Ericsson's balance sheet shows a ratio of 0.3 when you compare the debts to the shareholders' equity. For the year 2012, analysts estimate that the earnings per share will be between USD 0.62 and USD 0.70. At the current share price, Ericsson generates a yield of 2.7%.

Halliburton HAL

After the general market descent in the last days, Halliburton shares are currently priced at USD 30.56. Analysts are expecting Halliburton's 2012 earnings per share to be between USD 3.00 and USD 3.10, which gives a price-earnings ratio under 11 at today's share price. Halliburton's financial report for the third quarter 2012 shows earnings of USD 0.67 for the quarter.

The company has 70.000 employees and operates in 80 countries. The third quarter report of 2012 shows an increase of 8% of the revenue generated in Latin America, coming mainly from the good operational performance in Mexico and Brazil. In the region Middle East and Asia, Halliburton also reported a sales growth of 9%, coming primarily from the operations in Malaysia, Australia, and Iraq.

Halliburton's shares remain relatively cheap due to the fact that the company's net margin is only at 10% compared to the healthier 12% achieved by its direct competitor Schlumberger SLB. Halliburton has a solid balance sheet with a debt-equity ratio of 0.4 and, at the current share price, it generates a yield of 1.7%.

MSCI Turkey Investable Market Index Fund TUR

While the economy in many advanced industrialized countries is hardly growing, Turkish economic growth, as reported by the Wall Street Journal on September 10, 2012, remains at 2.9% for the third quarter of 2012. This represents a slowdown vis-a-vis previous predictions, but analysts still forecast the economic growth in Turkey to be above 3% for the whole of 2012.

This Exchange Trade Fund holds shares of most of the companies that make the Turkish stock market index. As a result, the ETF is heavily loaded with banks (about 50%), followed by consumer-products companies (around 13%) and industrial manufacturers (about 15%). 

During the last days, the price of this ETF has gone down with the rest of the market. This ETF generates a yield of 1.8%. You can also invest in Turkey by purchasing the American Depositary Shares of Turkcell TKC, but as a private investor, you may find difficult to buy shares of other companies in the Turkish stock market.

In terms of disclosure, readers should take into account that either I already own shares of these companies or that I am currently considering to add them to my investment portfolio. Before making any investment decision, readers should make their own research and check thoroughly several independent sources.

For more information about rational living and personal development, I refer you to my book about how to be rational  "The 10 Principles of Rational Living"

[Text: http://johnvespasian.blogspot.com]

[Image by rasmithuk under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]