Don't Listen To Wall Street
The Dynamic Wealth Report
July 12, 2010
by Jay Chernoff, Editor
Can you believe how bad mainstream media can be? It never ceases to
amaze me…
Let me give you an example. The other day I was sitting at my desk
drinking a cup of coffee. I was reading through the financial news like
I always do. I came across an article – and nearly spit my coffee on the
computer screen.
The article was talking about this year’s best performing stocks. But
none of these stocks were picked by the Wall Street analysts to do well…
You’ll never guess what came next… the article actually predicts
analysts will start recommending these companies! It claims this will
drive up their prices even higher.
I’m sure this article was supposed to be about compelling reasons to buy
these outperforming companies.
All I kept thinking about was… are you kidding me?
What we need to do is flip this idea on its head. What the article
actually says is analysts only picked big losers! Many of the top picks
by the experts on Wall Street are underperforming expectations.
These analysts make their living telling you when to buy and sell.
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There are a few problems with following advice from Wall Street analysts.
First, analysts’ picks can move stock prices. In general, this is a good
thing… except we don’t know who they told first! We could be coming very
late to the party. By the time you have a chance to buy these stocks,
they’re no longer undervalued.
Second, greed steps in… meaning expectations can rise faster than the
stock price. Buyers might consider it a disappointment if a stock
doesn’t shoot through the roof. They might sell their shares and end up
pushing the price even lower. I’ve seen it time and time again.
Finally, analysts tend to ignore the smaller companies. You may be
missing out on great companies because they happen to be too small to be
covered by Wall Street.
Fortunately, you don’t have to rely on analysts to find great stocks.
You don’t need hours of research or tons of money either. Just a little
homework will do.
One way I like to screen companies is by looking at dividend yield and
revenue growth.
Companies with high dividend yields and growing revenues tend to
outperform the overall market and provide steady returns in the
long-term.
Think about it…
First off, big dividends are nice. Who doesn’t want to get paid for
owning a stock? The average dividend yield on the S&P 500 is around 2%
right now. But you can get paid dividends of 5% or even 10%!
Secondly, dividends aren’t likely to get cancelled. After all,
management doesn’t want their company looking bad.
Another great benefit… there’s usually a floor on the price of the
stock. A company with a nice dividend is going to garner attention from
lots of investors. They’re going to gobble up shares of the companies
with the big dividends. This will eventually drive up the price.
It means if you get in early, you’ll be earning a big dividend. Best of
all, you might also grab a big increase in the share price.
Just look at SeaDrill Limited (SDRL). It’s an off shore drilling company
with equipment all over the world. I found this company by looking at
the dividend yield and revenue growth rate. It’s trading just over $20
but has a dividend around $1.75. That’s an 8% yield!
The share price traded at nearly $28 on April 26th but has dropped on
the bad press from the BP oil spill. I think the stock has a big upside.
See, SDRL has nothing to do with the Gulf disaster. It’s being unfairly
punished for the actions of another company. Once drilling resumes in
the Gulf, we should see offshore drilling companies regain some value
and SDRL shares should jump in price.
More importantly, SeaDrill owns over 40 rigs… but actually only has one
rig in the Gulf of Mexico! Most of its equipment is near Norway or in
Southeast Asia.
And… the company’s rig count is climbing.
Look, this is a strong company. SDRL is fundamentally sound, but the
markets don’t even know it. Check its low P/E of 3.4x. The company’s big
competitors all have P/E ratios over 20x and 30x. Talk about your misvalued stocks.
Also, SDRL is sitting on a cash hoard of over $1 billion. The company
can easily service its debt and pay its dividend even in the worst
market conditions.
Now is a good time to consider this stock for your portfolio. You won’t
hear any Wall Street analysts recommending companies like SeaDrill. But
that’s good news – we actually want to make money on our investments!
•
Gold Mining (Up 8%)
Over the last three months, one of the top performing industries is Gold
Mining. The flight to safety has driven gold prices to record highs. This is increasing the profitability of the companies mining the
precious metal. The result is higher prices for gold mining companies.
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