Magazine Review: Kiplinger

February 28, 2008

Kiplinger Personal Finance Magazine is my most highly recommended magazine for those investors looking to get a taste of everything from retirement, stock investing, saving money, business news, and a minimal amount of advertising.

Their magazine is organized in simple sections:

– Ahead
This section features columns from regular Kiplinger writers and a general outlook of the economy. This section may give quick recommendations for stock picks and will generally have less detailed stories compared to what you will find in the investing section.

– Investing
For savvy investors, this section will cover a comprehension (yet simple to understand) look into various investment options. The February 2008 issue had a really good 3 page analysis of sin stocks encompassing casinos, alcohol, and tobacco companies. Then about a year and a half ago, there was another really informative bullish article about “black gold” (aka coal industry), and due to that article, I went on to profit very nicely from Peabody Energy Company (BTU). You’ll also find other great articles on mutual funds, money funds, and bonds.

– Money
This section is exactly what it’s title states, it’s about your money. Whether you want to get the bottom line on housing prices, social security, loans, retirement, interest rates, or college tuitions, this is the section that will spark your interest. Everyone wants to make more money through investments, but if you don’t enough money to put into the stock market or mutual funds, you want to be able to retain as much as you earnings as possible.

– Living/Rewards
This section is like the poor man’s Consumer Reports where they’ll sometimes give comparisons of different products (ie HDTVs, smart phones, cars, rewards plans). You can also expect to see articles on best ways to remodel a home, what to keep in mind when shopping around for a house, or FAQ about the do not call lists. The average working American should be able to get some value or general insight through the living/rewards section.

Cost: $12 for 1 year of issues from their website
Investor Audience: everyone
Distribution: monthly
Overall Grade: A

Bottom line: At only $12, this magazine could end up making or saving you a whole lot more money than what it costs to subscribe. That is a good enough investment to justify supporting Kiplinger Personal Finance Magazine. If you are still too cheap enough to fork over $12, then you can go browse through past issues for free (although not 100% of magazine content is posted online).


Visa, It’s Everywhere You Want to Be

February 25, 2008

Today, Visa revealed terms for an impending IPO, first announced last November in a registration statement filed with the SEC. Visa is the largest credit card company in the US and operates the world’s largest retail electronic payments network.

Visa’s IPO Terms

Visa plans to offer 406 million shares for $37-$42, and will trade on the New York Stock Exchange under the symbol “V” [1]. While an official IPO date has not been announced, IPO researchers expect trading to begin on March 20.

The IPO Market

The number of US IPOs priced this year has declined 49% from the number priced at this time a year ago [2], a possible sign that companies expect capital is no longer as freeflowing as before.

Last year’s largest deals were issued by financial firms including Blackstone Group (BX), Interactive Brokers (IBKR), and Och-Ziff (OZM) Capital Management. Demand was strong at first, but after the initial IPO “pop”, the majority of the financial companies ended up with negative returns by the end of the year.

MasterCard (MA) had its IPO back in May 2006, and has had a 400% return since then. MasterCard had a nearly 100% return in the past year. It has consistently beat earnings estimates since IPO and is expected to continue outperforming the business services industry. This has been possible in the terrible credit market because MasterCard provides credit card services and is not an actual credit lender.

Visa, the company

Visa, like MasterCard, derives its revenue from providing processing services to merchants and banks. By using bank issues, Visa does not profit from the interest paid by cardholders, but this also isolates it from debt defaults. Thus, the revenues of card service providers depend largely on consumer spending.

Visa did indeed see a 33% rise in revenue in 2007, although it recorded a loss due to litigation settlements with American Express and Discover.

Life Takes Visa

It seems inopportune for Visa to be offering an IPO at a time when consumer credit is rapidly crunching. What’s the hurry?

It’s likely that the banks invested in Visa are looking for a big pile of cash to help ease the credit crisis. If Visa does indeed raise the $17 billion it is hoping for, this would be good news for underwriters JPMorgan Chase (JPM) and Goldman Sachs (GS). Citigroup (C) and Bank of America (BAC) are also shareholders.

Visa may also be pushing for an IPO to cover litigation costs after a number of recent lawsuits.

I expect that Visa will underestimate their initial pricing to gain investors’ confidence given uncertain times. And, even though consumers will be cutting back on unnecessary spending, they will probably increase their use of credit cards for the essentials. Visa is also the official sponsor of the 2008 Olympic Games. Paired with this visibility, Visa may be in for a good run-up.

1. Visa SEC filing
2. Renaissance Capital IPO Research

Solar Part 1: Lunar Eclipse, Solar Power

February 24, 2008

I hope the lunar eclipse was enjoyable for everyone. Of all the branches of science, Astronomy is the one that anyone can associate with. Who hasn’t looked up at the stars in absolute wonder. If you look up at the sky in the daytime you won’t see any stars. Wait a minute. You do see a single star, one star drowning out the rest, our beloved sun. Daylight is a constant reminder of how strong and how much energy our sun outputs. Solar cells can harvest that light and turn it into electrical power. There are many solar companies on the market, but how do you look past the green fever to find what’s golden?

First, you have to list all the promising solar companies and see where they stand in comparison to each other. As of February 24, 2008.

Company Symbol Mkt Cap (B$) P/E F P/E
SunTech Power STP 5.91 38.21 13.86
SunPower Corporation SPWR 5.49 615.04 22.12
First Solar FSLR 16.64 104.26 41.36
SolFocus Privately held      
Nanosolar Privately held      

There are several apparent trends.

First, the P/E is ridiculously high. The market has a lot of confidence in future earnings. First Solar’s 2007 revenue was almost 4 times its 2006 revenue. These companies are increasing their profit margins while doubling sales each year. The growth potential is enormous. The only thing that could possibly displace solar is nuclear fusion, but we are still at least 30 years away from that. People would rather have solar panels on their roofs than a nuclear reactor in their backyard.

Second, the F P/Es are reasonable, so one can assume that the current stock pricing takes next year’s projections into account. That’s easy to do, because most companies have already sold the panels they are going to make in the future.

Third, the companies with the potential to change the game are privately held. There is so much interest in solar, they don’t need to work very hard to raise the capital they need to start up their factories or develop their technology.

Fourth, the companies are still relatively small if they are truly the future of energy; their market cap should approach that of other energy companies. The future is bright.

In Part 2, I will go over various solar technologies.

Bottled Water, Next Generation Commodity

February 24, 2008

The stock exchange defines a commodity as “any unprocessed or partially processed good.” Wikipedia defines a commodity as anything for which there is demand, but which is supplied without qualitative differentiation across a given market. When we think of commodities or check the current prices of various commodities, we think of oil, natural gas, soybeans, corn, gold, silver, and other precious metals. Water, wind, and solar power are not considered commodities and cannot be publicly traded, but they are things that there are major demands for in our quickly developing world. Companies like First Solar, SunPower Corporation, and Suntech Power help provide megawatts of power through solar energy. Enercon and REpower manufacture the world’s largest wind turbines and take advantage of wind power to create energy. Finally we all pay water bills, we see Aquafina commercials on TV, and drink water out of public drinking fountains, yet the average person does not comprehend the demand for bottled water in this country. I guess it’s not just general water that is in demand, but the method of how we drink water and that Americans have a preference for the types of water they want and will pay for.

Within the last four quarters, Apple has reported Ipod revenue of 9.21 billion dollars with much help from the Ipod Touch and new versions of the Ipod Nano. 2007 movie tickets sales in the US totaled 9.66 billion dollars with blockbuster movies such as Spider Man 3, Shrek the Third, and Transformers all released last year. Also in 2007, Major League Baseball almost caught up to the National Football League in revenue with a little over 6 billion dollars. While all this revenue for MLB, Ipods, and movie tickets were quite impressive for 2007, what beat all those industries was bottled water. The United States contributed over 15-billion dollars to the bottled water industry last year!

Interesting bottled water statistics:

  • Americans drink more bottled water than coffee, milk, or beer. (Don’t go rushing to sell your Starbucks or Anheuser-Busch shares quite yet though)
  • In 1976, the average American drank 1.6 gallons of bottled water per year. Just last year in 2007, the average American drank over 28 gallons of bottled water. In over thirty years, we have increased our bottled water consumption by over seventeen times.
  • Fiji Water produces 1-million bottles/day while 50% of the residents in Fiji don’t even have reusable drinking water.
  • The only drink that outsells bottled water is carbonated soft drinks which totals to an annual consumption of 52.9 billion gallons.
  • Bottled water is a 50-billion dollar industry worldwide with bottling companies like Arrowhead, Poland Springs, Crystal Geyser, and Saratoga Springs.
  • 24% of US bottled water is tap water purified and repackaged by Coke & Pepsi (aka purified municipal water).
  • Pepsi’s Aquafina is the #1 selling bottled water with 13% market share while Coke’s Dasani bottled water is #2 with 11% market share.

This doesn’t mean that people are completely halting their consumption of carbonated beverages, but it means consumers are adding a lot more bottled water to their drinking options. Coke (KO) and Pepsi (PEP) realize that consumers are considering a cold bottle of water over a cola, and almost a quarter of the US bottled water industry is derived from those two companies. Just because the bottled water industry is flourishing , it doesn’t make Coke and Pepsi good investment options. At the same time they generate much revenue from their bottled water brands, they also rely on huge revenues from their carbonated drink options. I honestly don’t know of any good way to profit in the stock market from the large growth of the bottled water industry. There are much better deals in the market right now with better long-term growth than these two beverage companies.

For me, it’s just a major eye opener on how much Americans spend on purified municipal water when we can just boil and bottle our own tap water at home. If we’re paying a premium for bottled water, I’d think that we’d at least want some spring water to get our money’s worth. We tend to pay a very high price for convenience in this country. If gasoline starts to cost $4/gallon this coming summer and a gallon of milk rises to $6, then it may be prudent to bottle our own water sooner rather than later!!!!

Basics: Fun with Exchange-Traded Funds (ETFs)

February 21, 2008

Exchange-Traded Funds (ETFs) are relatively new to the US market, having been introduced only in 1993. ETFs allow investors to follow the performance of key indices and sectors while providing the flexibility and instant liquidity lacking in traditional mutual funds.

There was a time when mutual funds were the most accessible entry to professionally-managed diversification. However, professional management has a price, and after the active managers have collected their paychecks, approximately 80% of mutual funds underperform the average stock market return. (Index funds, which are automated mutual funds that track a stock market index, have lower annual fees – but that is an article for another day.)

ETFs differ from mutual funds in that they can be traded like a stock. ETFs allow intraday trading, unlike mutual funds, which are only traded for the net asset value at the end of the day. The fact that ETFs are traded like stocks also means that they can be shorted, bought on margin, or placed on limit orders. Options are also available.

Finally, ETFs have tax benefits over traditional mutual funds. Actively managed fund shareholders pay taxes on all the capital gains that the fund owns while they hold their shares, as opposed to just paying taxes on their personal capital gains.

Now, onto the ETFs. There are more than 300 of them, and here are some of the most popular ones:

  1. SPDRs State Street Global Advisors (SPY) – tracks the S&P 500
  2. PowerShares QQQ (QQQQ) – tracks the NASDAQ-100 index
  3. iShares Russell 2000 Index Fund (IWM) – tracks the Russell 2000 index

Here are a few that I am partial to:

  1. streetTRACKS Gold Shares (GLD) – invest in gold without the risk of buying gold futures or the hassle of storing gold bricks in your home
  2. SPDR S&P Metals & Mining (XME) – tracks the S&P Metals & Mining index
  3. iPath S&P GSCI Crude Oil Tot Ret Idx ETN (OIL) – tracks the Goldman Sachs Crude Oil Return Index

Lately, it has been easier to target sectors to stay away from than ones to invest in. These bear-market ETFs can do the shorting for you:

  1. UltraShort Financials ProShares (SKF) – corresponds to the inverse of the Dow Jones US Financials index
  2. UltraShort Real Estate ProShares (SRS) – corresponds to the inverse of the Dow Jones US Real Estate index
  3. UltraShort FTSE/Xinhua China 25 Proshare (FXP) – corresponds to the inverse of the FTSE/Xinhua China 25 index
  4. Rydex Inverse 2x S&P 500 (RSW) – corresponds to the inverse of the S&P 500

All of these can be traded an AMEX, NYSE, or NASDAQ.

Want Updates? Try RSS Feeds

February 20, 2008

How do you get notified of the latest and greatest investment articles without visiting everyday? The solution is to subscribe to the RSS Feeds. If you haven’t noticed before, there are links to the RSS Feeds in the “meta” side panel. RSS stands for really simple syndication, so it must be easy. For our purposes it is a list of links and descriptions of those links. When an article gets published this list gets updated with a link to the new article. The ease of use comes from the many ways to read RSS without opening your web browser.

Here is a CNET article about reading RSS.

You can subscribe to RSS in your

  1. web browser (Firefox, Internet Explorer, Opera)
  2. web-based e-mail account (Yahoo, Gmail)
  3. e-mail program (Thunderbird, Outlook, Windows Live Mail)
  4. hand-held device (PSP, iPhone)
  5. standalone desktop application
  6. desktop widgets

I know some of you are already using RSS Feeds to get updates. Any suggestions about other/better methods are welcomed. I hope this will save people time while keeping them informed. Feel free to subscribe to RSS on other websites too.

2008 IRA Contribution Changes

February 12, 2008

As April 15, 2008 (deadline for 2007 IRA contribution) approaches, people looking to add more to their IRA should be aware of the contribution limit changes for 2008. Contributors that are 49 and below will see their yearly contribution maximum increase from $4000 to $5000. Then for those above 50 years of age, their maximum contribution climbs from $5000 to $6000.

IRA Contribution Year Max Contribution (Age 50 and Under) Max Contribution (Above age 50)
2007 $4000
2008 $5000

Can I contribute to both Traditional and Roth IRA?

Yes, you can contribute to both types of IRAs in a given year but you cannot contribute the yearly maximum toward each of the IRAs separately. Therefore if you are 35 years old, your maximum IRA contribution is $5000 in 2008. You can put in $3000 into a Traditional IRA and $2000 into a Roth IRA (which totals $5000). What you can’t do is put $5000 in both the Tradition and Roth accounts.

What part of the year is the best time to contribute to an IRA account?

Ideally, as early as possible. If you want to fund your 2008 IRA as early as possible, it would have been best to do so on January 1, 2008. The earlier you finance your IRA, the earlier you can start to invest your money and let it compound and grow. Due to financial constraints, sometimes people have other financial obligations they need to handle (like student loans, mortgages, or car payments) before deciding how much they can afford to add to their retirement account.

Are there any eligibility limitations to contribute to a Roth IRA?

Yes there is. The tables below details what scenarios for 2008 and 2007 that you can are allowed to contribute a full Roth IRA amount, partial contribution, or even ineligible. Totals are based on adjusted gross income (AGI).

2008 Roth IRA Eligibility:

Marital Status Eligible for Full Contribution
Partial Contribution Allowed Ineligible
Single <$101,000 Between $101,000 – $116,000 >$116,000
Married Filing Jointly <$159,000 Between $159,000 – $169,000 >$169,000

2007 Roth IRA Eligibility:

Marital Status Eligible for Full Contribution
Partial Contribution Allowed Ineligible
Single <$99,000 Between $99,000 – $114,000 >$114,000
Married Filing Jointly <$156,000 Between $156,000 – $166,000 >$166,000

How much is meant by Roth partial contribution?

Please refer to chapter 2 (page 63, worksheet 2-2) of the IRS publication 590 on the 11 step calculation to see how much partial contribution you’re allowed if you meet that Roth IRA stipulation.

Since the IRA limits are increasing in 2008, you will have much more flexibility, so take that into consideration as you fund your 2007 contribution (if you haven’t already).