The Slant http://slant.investorplace.com Turning headlines into real investing ideas Fri, 18 Apr 2014 14:47:11 +0000 en-US hourly 1 http://wordpress.org/?v=3.8.1 Is a Stock Market Crash Coming Soon? http://slant.investorplace.com/2014/04/stock-market-crash/ http://slant.investorplace.com/2014/04/stock-market-crash/#comments Fri, 18 Apr 2014 14:22:04 +0000 http://slant.investorplace.com/?p=14860 Stock market crash fears are rising as investors worry about volatility in 2014 and momentum slowing after a 30% up-year in 2013. Here's why:

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Stock market crash fears always seem to pop up once things get rocky. And undoubtedly, things have been rocky in 2014 — the major stock market indices have been volatile and have struggled to make progress.

So after a roaring 2013, are we in bear market mode at last and doomed for a stock market crash?

Maybe.

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According to this week’s sentiment survey from the American Association of Individual Investors (AAII), bullish sentiment dropped from 28.48% down to 27.22%, while bearish sentiment increased from 34.11% to 34.25%.

Now, this is no guarantee that stocks will crash and burn; we’ve had plenty of head fakes since 2009, and the market has managed to march steadily higher in the face of seemingly dark outlooks.

Also, a dip of 10% to 15% does not portend the end of the world — and a number of strong players might even manage to swim upstream during broad market declines.

Still, as I illustrated recently with a bunch of other charts and data, there are increasing signs that the market is running out of gas.

Even if a stock market crash isn’t certain, the chance of a correction is quite real given all this.

So investors need to prepare.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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How to Harvest Profits With Organic Food Sales http://slant.investorplace.com/podcast/2014/04/audio-harvest-profits-organic-food-sales/ http://slant.investorplace.com/podcast/2014/04/audio-harvest-profits-organic-food-sales/#comments Fri, 18 Apr 2014 13:43:20 +0000 http://slant.investorplace.com/?post_type=slant-podcast&p=14857 Organic food sales are growing fast, and Hain Celestial, UNFI and Sprouts Farmers Markets are three great stocks to play this trend.

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wrote recently about the rapid growth in organic food sales, and about how investors can play this trend with Sprouts Farmers Market (SFM), United Natural Foods (UNFI) and Hain Celestial (HAIN) in addition to the popular Whole Foods Market (WFM) angle.

And the piece seems to have struck a chord, getting me time on Fox Business to discuss the trend, as well as a recent radio spot on WRKO Boston.

You can listen to my reasons to be bullish on organics in the accompanying podcast, but the most important thing to remember is the numbers.

When you considerthat the Department of Agriculture’s Economic Research Service reported U.S. organic food sales of $28 billion in 2012, accounting for more than 4% of total at-home food sales, the opportunity is clear.

And when you see the growth rate, with organic food sales up by double digits from 2011 sales of about $25 billion, and more than 150% growth in 2004 sales of $11 billion, it’s even more obvious that these organic food stocks could be a powerful addition to your portfolio.

Check out the above audio clip for more.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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I Hate Yahoo So Much… But Can’t Hate YHOO Stock http://slant.investorplace.com/2014/04/yhoo-stock-yahoo-earnings-marissa-mayer/ http://slant.investorplace.com/2014/04/yhoo-stock-yahoo-earnings-marissa-mayer/#comments Thu, 17 Apr 2014 12:10:59 +0000 http://slant.investorplace.com/?p=14846 As much as I hate Yahoo, as much as I doubt whether this company will stay relevant long-term and whether Marissa Mayer will be around in another 18 months, it's awfully hard to bet against YHOO stock right now.

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Yahoo (YHOO) is far from a tech leader these days. It’s still largely running a Web 1.0 operation in the U.S., with a weak ad business and an almost panic-stricken desire to buy out as many smaller internet companies as possible.

yahoo-stock-yhooAnd most galling of all, CEO Marissa Mayer admitted in January that her Yahoo turnaround would take years … this, after she left Google (GOOG) in July 2012 for the top spot at Yahoo.

Even after 18 months and some 37 acquisitions under her belt since taking the job, apparently shareholders need to just relax and be patient.

It’s easy to hate Yahoo. And as a U.S. media brand, I have serious doubts about where this company is headed.

But despite all this, YHOO stock continues to please investors. Yahoo gapped up 6% on Wednesday thanks to strong quarterly results, and while it’s down year-to-date in 2014, the Internet giant is still up about 50% in the last 12 months and about 130% since Marissa Mayer took over.

And you know what? Based on recent earnings and investor sentiment, Yahoo will only move higher.

As much as I hate Yahoo … I just can’t hate YHOO stock.

What’s Right at Yahoo

Recent Yahoo earnings from its December quarter showed fantastic results — mainly from its much-hyped Alibaba stake.

As I wrote in 2013, the only reason for anyone to own YHOO stock is because they believe in Alibaba and expect a wildly profitable initial public offering … and that clearly appears to be the case on Wall Street. Revenue growth at Alibaba had slowed, but accelerated again at the end of 2013 to a stunning 66% growth rate for a total of about $3.1 billion — well above the 51% growth rate in the previous quarter, and certainly good enough to trounce estimates.

Valuation targets for Alibaba at IPO have marched higher from $100 billion in early 2013 to as much as $200 billion right now. With a 24% stake, Yahoo has been riding that wave higher — and if the valuation holds, it could theoretically see its Alibaba ownership valued at more than the current $37 billion market capitalization for all of YHOO stock and its related subsidiaries, cash and investments right now.

Alibaba is the gift that keeps on giving, and investors who pooh-pooh Yahoo’s over-reliance on its stake in the Asia Internet powerhouse cannot afford to overlook the bottom-line impact. Sure, the long-term prospects of YHOO stock depend on how CEO Marissa Mayer will ultimately spend the windfall from a successful Alibaba IPO … but there’s no rule that you have to hang on to Yahoo for a decade and be beholden to whatever turnaround scheme comes to pass.

Why not just ride the Alibaba momentum and strong investor sentiment after earnings?

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After all, it’s an open secret that the only thing Wall Street cares about is adding up Yahoo’s Alibaba payday, the value of its Yahoo Japan stake and the $4.2 billion-plus in cash and short-term investments on the books. This great chart from Matt Klein over at Bloomberg View probably sums it up best.

So why worry about stagnant results for Yahoo’s core U.S. business, with weak search and display advertising metrics? Why sweat the struggle to move Yahoo’s business into a mobile age and beyond the old “portal” model?

All that matters is that at the moment, YHOO stock is undervalued in relation to its parts.

YHOO Stock Has a Lot Wrong, However

Of course, this simple arithmetic of the moment will not bear out over the long term. So investors need to know what they are signing up for, and be realistic about the time horizon.

Although Yahoo did see a “positive” quarter for its core U.S. Internet business, a measly 5% uptick in search revenue and 2% growth for display ads is hardly something to get excited about. Furthermore, Yahoo earnings saw operating income barely meet forecasts.

But most troubling should be how mum Marissa Mayer and Yahoo’s management was on the potential for a tax efficient sale of its Alibaba stake. And according to reports, some analysts believe some of the proceeds from the Alibaba IPO might be used for even more acquisitions or other “turnaround” efforts.

For investors depending on a mammoth special dividend for YHOO stock holders after the Alibaba payday, this is a bit of a downer — particularly considering Yahoo sold some of its stake in Alibaba back in 2012 for $3 billion and briefly promised that cash to shareholders before reneging.

Not only has that sale proved quite hasty given the continued brisk growth of the Asian Internet powerhouse, but proof that Marissa Mayer may be suffering from delusions about exactly what shareholders expect her to do when YHOO gets paid.

But this is all medium-term and long-term stuff, of course. It has little to do with the simple math Wall Street is doing based on Yahoo’s Alibaba stake.

Right now, the bulls seem to have plenty of fodder given the strength of Yahoo earnings and the big growth of Alibaba in anticipation of its IPO later this year.

So as much as I hate Yahoo, as much as I doubt whether this company will stay relevant long-term and whether Marissa Mayer will be around in another 18 months, it’s awfully hard to bet against YHOO stock right now.

But after the Alibaba IPO … well, all bets are off.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.  As of this writing, he did not hold a position in any of the aforementioned securities.

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FB Stock: Can Facebook Earnings Top High Expectations? http://slant.investorplace.com/2014/04/fb-stock-facebook-earnings/ http://slant.investorplace.com/2014/04/fb-stock-facebook-earnings/#comments Thu, 17 Apr 2014 10:41:42 +0000 http://slant.investorplace.com/?p=14820 Facebook earnings resulted in a big leg up for FB stock in January, but can the stock repeat this time around?

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Facebook (FB) has had a busy start to 2014. Facebook earnings blew the doors off in January, FB stock is up 8% despite a small loss for the broader S&P 500 index and the company has rattled off a bunch of big-time acquisitions.

fb-stock-facebook-investingBut for the next few weeks, Facebook shareholders will be most concerned about the balance sheet instead of the drumbeat of headlines and daily FB stock charts.

That’s because the biggest catalyst for FB stock performance lately has been its blowout earnings and revenue growth posted at the end of January; FB stock gapped up by double-digits the next day as a result and has stayed strong ever since.

So what’s in store this time when Facebook earnings hit next week on April 23?

FB Stock Faces Tough Earnings Expectations

The question investors need to ask is whether that rate of growth is enough to top what are increasingly becoming very high expectations for the social media giant and its CEO Mark Zuckerberg.

Growth is not a problem. Facebook earnings are up against a revenue target of $2.35 billion on the quarter, growth of over 60% year-over-year but down slightly quarter-over-quarter; the consensus EPS target is 24 cents per share, roughly double last year’s number and up modestly from the 20 cents per share reported in January.

Hitting those targets might not be all that hard, either. After all, FB has handily topped expectations in the past — including beating EPS targets by 30% in its October earnings report, with little fanfare to follow.

Instead, FB stock has to not just show growth that meets Wall Street forecasts… but numbers that really wow investors.

If Facebook manages to see its revenue stay steady in the face of seasonality and the prediction of a decline, FB stock could be off to the races again.

But if the slowdown hits as expected and the details disappoint? Well, Facebook earnings simply hitting the mark may not be enough after FB stock has raced up 120% in the last 12 months.

Facebook Earnings Could Be Big Either Way

For the record, I have a horrible history of predicting Facebook earnings. I figured that Q4 numbers would be ugly in January based on a few factors including:

  • The possibility of declines in North American or European users, which are the most valuable to FB stock
  • Trouble with online ad rates, as evidenced by continued struggles at Google (GOOG), Yahoo (YHOO) and AOL (AOL) to increase their “cost per click” — that is, the rate that these websites can charge advertisers.
  • Waning sentiment, from both investors and consumers who think Facebook is now getting “uncool.”

I still think these three pressures are big ones for FB stock in the long-term.

But as for Facebook earnings next week? Well, they may not be troublesome just yet.

For investors, then, the real thing to watch is going to be whether Facebook revenue impresses and avoids the modest sequential decline that many are looking for… or whether it indeed posts a sales slowdown that could be seen as a big negative if other details aren’t all that grand.

Although I don’t own FB stock personally, my two cents is that we’ll see a rather solid Facebook earnings report that fails to prompt a breakdown or a breakout and simply maintains the course.

I could be wrong and Facebook earnings could blow the doors off again, but I don’t think that’s very likely given the pressures on the business and the prediction of quarter-over-quarter declines.

I also could be wrong the other way should FB stock miss the mark widely.

And if this latter scenario is the case, it could be off to the races to the downside.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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3 Ways to Make Green on Organic Food Stocks http://slant.investorplace.com/video/2014/04/3-ways-make-green-organic-food-stocks/ http://slant.investorplace.com/video/2014/04/3-ways-make-green-organic-food-stocks/#comments Wed, 16 Apr 2014 15:26:21 +0000 http://slant.investorplace.com/?post_type=slant-video&p=14833 Organic food stocks are a great way to tap into the fast-growing segment of natural foods while getting the stability of a consumer staples play.

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Organic food sales have been growing rapidly over the last decade or so, and stocks that can tap into this trend have a lot of potential.

As I wrote recently, it’s not just the big dog in Whole Foods (WFM) that is worth a look. I recently went on Fox Business to chat about opportunities in organic food stocks such as Sprouts Farmers Market (SFM), United Natural Foods (UNFI) and Hain Celestial (HAIN).

When you consider that the Department of Agriculture’s Economic Research Service reported U.S. organic food sales of $28 billion in 2012, accounting for more than 4% of total at-home food sales, the opportunity is clear. And when you see the growth rate, with organic food sales up by double digits from 2011 sales of about $25 billion, and more than 150% growth in 2004 sales of $11 billion, it’s even more obvious that these organic food stocks could be a powerful addition to your portfolio.

Check out the above clip for more information.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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Shut Up About the Inflation Rate http://slant.investorplace.com/2014/04/inflation-rate-consumer-price-index/ http://slant.investorplace.com/2014/04/inflation-rate-consumer-price-index/#comments Wed, 16 Apr 2014 13:12:20 +0000 http://slant.investorplace.com/?p=14805 Sure, CPI came in unexpectedly high for March. But considering that a lot of other nations are fighting against DE-flation, this is a good thing for the U.S. economy.

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Inflation rate readings, as measured by the consumer price index, headed “unexpectedly” higher in March. The inflation rate was pushed higher in large part thanks to increases in food, energy and housing costs.

inflation-rate-consumer-price-index

But before you start freaking out about hyperinflation, remember that the biggest bump to food and energy was the weather. Very cold weather caused a spike in energy demand for heating, and drought in California and South America made harvests smaller.

So stop with the hysterics. We are not suffering runaway price inflation.

I mean, gold prices just dipped under $1,300 again. Does that sound like hyperinflation to you? 

Our Inflation Rate Is Good

The reality is that while consumer price index readings were up in March, that’s actually a good thing.

A recent BusinessWeek report laid bare the problems facing Europe when it comes to deflation — that’s falling prices instead of rising ones — and ultra-low interest rates.

“Past a certain point, falling interest rates go from being helpful to a little scary. An extremely low interest rate can signal that investors have no faith in a country’s ability to grow on its own and that they expect central banks to keep official rates superlow for a long time to gin up economic activity.”

At the same time, there was this report of deflation fears from the Federal Reserve in The Wall Street Journal.

“On its face, flat consumer prices sound like a blessing that holds down household costs. But when tepid inflation is associated with small wage gains, excess business capacity and soft global demand, as now, economists see it as a sign of broader economic malaise that restrains investment and hiring. Exceptionally slow wage and profit gains also make it harder for household and business borrowers to pay off debt.”

This is why, according to the WSJ, Federal Reserve officials recently discussed “keeping short-term interest rates pinned near zero until they saw inflation move up.”

That’s right — until inflation moved up, not down. Meaning the CPI jump was just what Janet Yellen ordered.

It’s worth remembering the struggles long faced by Japan, which is the poster child for the risks of deflation with its “lost decade.” And in fact, one of the recent reasons for optimism in Japan is that inflation is picking up again at a higher-than-expected rate. Most recently, the country has been celebrating as inflation has come in hotter than expected at the beginning of April.

The reality is that, like the EU and Japan, the Fed is — and should be — much more worried about deflation in the current lackluster global economic environment than it is concerned about runaway inflation.

That goes for investors, too.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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Marijuana Stocks – Smoke ‘Em If You Got ‘Em http://slant.investorplace.com/2014/04/marijuana-stocks-mjna-phot-hemp/ http://slant.investorplace.com/2014/04/marijuana-stocks-mjna-phot-hemp/#comments Wed, 16 Apr 2014 12:55:49 +0000 http://slant.investorplace.com/?p=14801 If you still have big gains in your medical marijuana stocks because you bought at a great time, it might be time to cash out. Or if you are sitting on big profits in other marijuana stocks like HEMP or CBIS, I'd highly recommend selling out at least a partial position now.

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Marijuana stocks have dominated financial media in 2014 after voters legalized pot in Colorado and Washington for recreational use.

And it’s no surprise why these companies have exploded:

  • First, marijuana stocks are looking to benefit from a changing legal landscape in favor of pot use.
  • Also, many medical marijuana stocks have long been cult hits by penny stock traders … even if they were small players with limited sales.
  • And lastly, a little mainstream media coverage to this corner of the market goes a long way for marijuana stocks, especially those with cheap share prices and low volume.

It’s a narrative investors have eaten up like they’ve been suffering from an epic case of the munchies.

Medical Marijuana (MJNA), for instance, went from 9 cents around Thanksgiving to as high as 40 cents for a brief moment in January to deliver a 330% gain to lucky marijuana stock investors. Other stocks including Hemp, Inc. (HEMP), Cannabis Science (CBIS), GW Pharmaceuticals (GWPH) and Tranzbyte Corp. (ERBB) also saw their moment in the sun.

Marijuana Stocks Might Not Have More Upside

However, marijuana stocks have mostly rolled back lately.

Part of it is because the momentum has faded, and not just because of fears that the stocks are overbought. There have been many revelations over the last few months about how difficult it is to turn a profit for a medical marijuana dispensary or for-profit recreational growing operation. There are also reports about how many banks are reluctant to lend money to pot businesses or act as the financier of choice for marijuana stocks.

marijuana-stocks-growlife-phot-stockAnd, of course, trading in GrowLife (PHOT) has been suspended by the Securities and Exchange Commission. The SEC has concerns about “questions that have been raised about the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in PHOT’s common stock.”

It all adds up to a rather inhospitable environment for marijuana stocks going forward.

So, if you still have big gains in your medical marijuana stocks because you bought at a great time, it might be time to cash out. Or if you are sitting on big profits in other marijuana stocks like HEMP or CBIS, I’d highly recommend selling out at least a partial position now.

Smoke ‘em if you got ‘em, because the marijuana stock boom might not last much longer.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.  As of this writing, he did not hold a position in any of the aforementioned securities.

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Japan Stocks Crashing – Is the U.S. Next? http://slant.investorplace.com/2014/04/japan-stocks-etf-ewj-dxj/ http://slant.investorplace.com/2014/04/japan-stocks-etf-ewj-dxj/#comments Tue, 15 Apr 2014 18:02:50 +0000 http://slant.investorplace.com/?p=14794 America had better wake up and seriously look at social programs, immigration reform and other issues to prevent our nation from being stuck in the same situation as Japan. The baby boomers are aging and will skew our demographics (and economic growth prospects) steadily closer to what Japan is suffering right now.

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The iShares MSCI Japan ETF (EWJ) — a fund holding a basket of Japan stocks — had a great 2013 thanks to “Abenomics.” The loose monetary policy from the Bank of Japan led to a dizzying 57% increase for the Nikkei stock market index last year, and a total return of 26% for the EWJ fund.

The smaller WisdomTree Japan Hedged Equity Fund (DXJ) — which holds Japan stocks but hedges against the yen — put on an even better show thanks to a weaker yen and stronger dollar, with a 2013 return of 41%.

But if you think Japan is a good buy anymore, think again. Both ETFs are down more than 10% year-to-date after their big runs in 2013.

This juicing by the Bank of Japan has run out of gas. Persisting now are the old pressures of “stagflation” brought on by slow economic growth and ultra-low inflation that has suppressed spending and wages.

Why? Well, because of demographics, of course. Older Japanese citizens demand more public spending but produce less economic output, and that trend has continued unabated.

Take this, from the Japan Times today:

“Japan’s population has shrunk for the third year running, with the elderly making up a quarter of the total for the first time, government data showed Tuesday.

The number of people in the world’s third-largest economy dropped by 0.17 percent or 217,000 people, to 127,298,000 as of last Oct. 1, the data said. This figure includes long-staying foreigners.

The number of people aged 65 or over rose by 1.1 million to 31.9 million, accounting for 25.1 percent of the population, it said.

With its low birthrate and long life expectancy, Japan is rapidly graying and already has one of the world’s highest proportions of elderly people.

The aging population is a headache for policymakers who are faced with trying to ensure an ever-dwindling pool of workers can pay for the growing number of pensioners.

The country has very little immigration. Any suggestion of opening its borders to young workers who could help plug the population gap provokes strong reactions among the public.

The proportion of people aged 65 or over is forecast to reach nearly 40 percent of the population in 2060, the government has warned.”

There are two lessons here:

The first is that any central bank fixes cannot help Japan truly counteract the weight of an aging population and demographics that result in a smaller and older workforce every year.

The second is that America had better wake up and seriously look at social programs, immigration reform and other issues to prevent our nation from being stuck in the same situation. The baby boomers are aging and skewing our demographics (and economic growth prospects) steadily closer to what Japan is suffering right now.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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Facebook Pays Huge Taxes, Banks Get Big Breaks, AAPL Dodges Overseas http://slant.investorplace.com/2014/04/corporate-taxes-facebook-apple-banks/ http://slant.investorplace.com/2014/04/corporate-taxes-facebook-apple-banks/#comments Tue, 15 Apr 2014 13:57:22 +0000 http://slant.investorplace.com/?p=14780 While Apple and Google are stowing their cash abroad to avoid taxes, a number of big bank stocks including Morgan Stanley and Bank of America posted a negative tax burden in 2012 thanks to big breaks from Uncle Sam, meaning they were due refunds.

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Tech stock Facebook (FB) and defense contractor General Dynamics (GD) paid the highest effective tax rate of the largest 100 S&P stocks in tax year 2012, with whopping 89% and 161% effective tax rates, respectively, according to a recent report by financial website WalletHub.

fb-stock-facebookMeanwhile, a number of big bank stocks including Morgan Stanley (MS), Bank of America (BAC) and AIG (AIG) got off scot-free with a negative tax burden thanks to big breaks from Uncle Sam.

That means these big bank stocks actually were due a refund instead of a tax bill.

You can view highlights of the report here on WalletHub — which, it’s worth noting, is based on tax data from 2012, not 2013. After all, today is the deadline for most Americans to file their tax returns, so it’s hard to compile last year’s data quickly. 

Some items of note include:

  • The rate of S&P 100 companies’ international taxes is about 30% less than U.S. taxes.
  • Tech companies — including Apple (AAPL), eBay (EBAY) and Google (GOOG) — pay roughly 80% lower rates abroad than in the U.S.
  • Six S&P 100 companies actually paid a negative overall tax rate (and thus got tax refunds) for 2012. In addition to BofA, MS and AIG, pharma stocks Abbott Laboratories (ABT) and Bristol-Myers Squibb (BMY) along with telecom Verizon (VZ) avoided taxes and got a check back from Uncle Sam.
  • The average overall tax rate for corporations in the S&P 100 was 26.9%.

WalletHub compiled 2012 data on company profits, withholding practices and tax payments on the state, federal and international levels to determine effective and deferred tax rates for each business. Check out the report here on WalletHub for more info.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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It’s Time to Sell Your Bonds http://slant.investorplace.com/2014/04/sell-bonds-bond-prices-yields/ http://slant.investorplace.com/2014/04/sell-bonds-bond-prices-yields/#comments Tue, 15 Apr 2014 13:40:29 +0000 http://slant.investorplace.com/?p=14773 If you're younger or more aggressive with your holdings and don't rely on bonds for income, it might be wise to sell some bonds and bond funds now that yields have rolled back and prices are high.

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Bond prices have soared in 2014, with the iShares 20+ Year Treasury Bond ETF (TLT) jumping more than 8% since January as the stock market has slumped for a small decline.

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The rally in bond prices and the drop in interest rates on the 10-year Treasury bond have surprised some investors. After all, it’s a bit counterintuitive to see interest rates declining even as the U.S. Federal Reserve talks about the likelihood of tighter monetary policy and higher interest rates in the next year or so.

So what gives … and more importantly, can the rally in bond prices last?

The short answer is that a selloff in the stock market and fears of unrest in Russia (and elsewhere) have driven investors into the safety of bonds. But this near-term trend cannot continue for long, and investors should expect a correction in bond prices very soon.

Bond Prices and Yield – What’s Going On?

Here’s some investing 101 about bonds, in case you’re unfamiliar:

As yields increase, the principle value of bonds falls. This is logical: Why would you pay the same amount for the face value of a bond with a 3% yield when you can get a similar note from a similar government or corporation at a 3.5% or a 4% yield? The old debt is simply not as attractive, so bond prices fall as a result.

On the other hand, when new debt is offered at a lower interest rate, the older bonds with higher yields are naturally more attractive — and investors are eager to buy them, driving up the prices.

This doesn’t affect you if you hold bonds to duration and expect a regular stream of income, with no plans to sell these bonds. However, many investors don’t own individual bonds and are instead in long-term bond funds that regularly buy and sell their holdings — exposing investors to a loss in principle if rates rise.

Given this relationship between bond prices and yield, many investors have been worried about holding long-term bond funds like the TLT ETF or mutual funds, including the PIMCO Long Duration Total Return Fund (PLRIX) or the Vanguard Long-Term Bond Index Fund (VBLTX). Rates are expected to rise, and these funds are the most exposed to interest-rate risk given the very long duration of their holdings.

But Treasuries have rallied sharply to start the year, partly because of political strife between Russia and Ukraine. Similarly, the roaring rally for equities in 2013 seems to have lost steam with the S&P taking a breather. Many investors have gone “risk off” as big names from Amazon (AMZN) to General Motors (GM) to Best Buy (BBY) have all sold off more than 20% since Jan. 1.

Throw in the Fed’s Janet Yellen seeming to backpedal on the timing of rate hikes, and you can understand why investors have been buying more bonds, sending rates dipping as a result.

Why You Should Sell Bonds Now

Now, if you own bonds to duration or if you’re an income-oriented investor who relies on your monthly coupon payments to pay the rent, I wouldn’t read too much into the recent volatility. After all, your portfolio is designed to “pay” you with your bond income — not to make a lot of dough based on principle increases.

However, if you’re younger or more aggressive with your holdings and don’t rely on bonds for income, it might be wise to sell some bonds and bond funds now that yields have rolled back and prices are high.

Because frankly, this can’t last. Bond prices and yields will both reverse course as the U.S. continues its slow and steady economic improvement, and the Fed continues to slowly tighten monetary policy and end QE.

Simply ask yourself, “How much lower can interest rates realistically go?” Barring a shock to the market like a terrorist attack at home or a market meltdown that sparks a massive departure from stocks, I remain convinced rates are at or near as low as we’ll see them for some time.

After all, 10-year U.S. Treasury bonds yield yielded 3% at the end of 2013 just a few months ago. Even making back half of that ground would result in a pretty modest hit for long-term bond funds.

I would advise taking some money out of long-term bond funds right now and waiting for the inevitable pop in yields before rotating back in. Or if you really want to be aggressive, consider shorting bonds via an inverse bond fund like the ProShares Short 20+ Year Treasury ETF (TBF).

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.  As of this writing, he did not hold a position in any of the aforementioned securities.

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