Looking for investment options? Bonds are your best bet

The economy is heading for a slowdown and bond yields are not far from peaks seen during the year.  This by itself is a good case for buying into bond yields and the risk return profile of investing in bonds is very much in your favour. Bond funds that invest in government and corporate bonds are an alternative if you do not want to invest directly in bonds.

Ten year benchmark government bond yields are trading at around 8.25% levels. The peak seen on the 7.80% 2021 government bond, which is the benchmark ten year bond, is 8.45%, seen in May 2011. Benchmark AAA corporate bonds of five and ten year maturities are trading at close to 9.5% levels, down from peaks of 9.75%. The current levels of bond yields are at close to three year highs and the levels are where they are due to inflation. Inflation as measured by the WPI (Wholesale Price Index) is running at 9.06% levels and is expected to come in higher for the month of June, due to the fuel price hikes by the government in June. The RBI has raised the benchmark policy rate, the repo rate by 275 bps over the last fifteen months as inflation kept steadily moving higher from levels of 5% to levels of 9% and above. The repo rate is at 7.50% at present.

The economy in the meanwhile has show signs of slowdown. The IIP (Index of Industrial Production) growth for the month of May 2011 came in at 5.6%, against market expectations of over 8%. The IIP growth for May 2010 was at 8.5%.  IIP growth for the month of April 2011 was at 5.7% taking the April-May 2011 average to 5.7%. While two months of weak industrial growth does not indicate a slowdown for the full year, the environment outside does suggest that the economy can slowdown faster than expected and force GDP growth numbers for 2011-12 to be revised downward from 8%.

The fall in IIP growth for May is to be seen in conjunction with the status of growth drivers in the economy. Monetary policy is tight and its effects are seen on credit growth, which has fallen from levels of 23.5% to levels of 20% over the last six months. Interest rate sensitive industries from auto to real estate are seeing a slowdown. Vehicle sales growth has dropped from high double digit growth levels to low single digit growth levels. Infrastructure spending is coming off due to tight liquidity and high interest rate conditions (as per industry leaders).  Financial services sector is facing issues of a weak capital market with broad equity indices still trading below levels seen in late 2007. High interest rates and weak capital markets are forcing corporates to put off expansion plans. There is clearly a case for the economy to slow down further.

The economic environment in the global front is not looking positive. Economic growth in the big economies of US, China and Japan is looking to come off. US unemployment rate at 9.2% has gone up from below 6% levels seen in 2006 and is not looking to go down soon. China is fighting inflation, which is trending at 6.4% levels and has raised rates and lowered growth forecasts. Japan is coming out of a natural disaster that closed down it nuclear facilities. Eurozone is facing a debt crisis and many countries in the Eurozone including Greece, Spain, Portugal, Italy and Ireland will see growth come off sharply on spending cuts, and this will bring down growth in the region.

Growth drivers absent, inflation drivers such as demand and commodity prices will also cool off leading to falling inflation expectations. In such a scenario, bond will do extremely well and at levels close to three year highs, chances of yields falling is much better than chances of yields rising. 

The author is editor www.investorsareidiots.com a financial web site for investors.

Energizer Upgraded to Strong Buy - Analyst Blog

On Jul 6, 2013, Zacks Investment Research upgraded Energizer Holdings Inc (ENR) to a Zacks Rank #1 (Strong Buy). With a strong return of 37.1% over the past one year and a positive estimate revision trend, Energizer is an attractive investment opportunity.

Why the Upgrade?

Strong second quarter results, innovative product pipeline, stringent cost control and the positive effects of the ongoing restructuring activity contributed to the upgrade.

Energizer reported second quarter results on May 1, 2013. Earnings of $1.80 per share jumped 47.5% from the year-ago quarter and comfortably surpassed the Zacks Consensus Estimate by 51 cents. This was the third consecutive quarter of positive earnings surprise with an average beat of 11.1%.

Based on the strong results, Energizer reiterated its fiscal 2013 earnings guidance in the range of $6.75 to $7.00 per share. The company expects earnings in the range of $2.75 to $3.00 in the second half of 2013 compared with $2.94 per share earned during the year-ago period

Although Energizer forecasts advertising expenses to increase in the latter half of 2013, restructuring savings are expected to increase at a much faster rate during the period. Energizer upped its restructuring outlook for fiscal 2013 to $50.0-$60.0 million from its earlier estimate of $25.0-$35.0 million.

As a result, gross savings from the restructuring project is expected to increase an additional $25.0 million to $225.0 million, of which $150.0 million is expected to be used for improving profitability, going forward.

The Zacks Consensus Estimate for fiscal 2013 increased 1.3% (9 cents) to $6.93 per share over the last 90 days. The current estimate is within the guidance range provided by Energizer. For fiscal 2014, the Zacks Consensus Estimate increased 0.5% (4 cents) to $7.61 per share over the same period.

The long-term expected earnings growth rate for Energizer is 11.0%.

Other Stocks to Consider:

Investors can also c! onsider other stocks that are doing well right now. These include Akamai Technologies (AKAM), Yahoo! (YHOO) and Moody's Corp (MCO). While Akamai and Yahoo! carry a Zacks Rank #1 (Strong Buy), Moody's carries a Zacks Rank #2 (Buy).

Aetna Inc: Fundamental Stock Research Analysis

Before analyzing a company for investment, it's important to have a perspective on how well the business has performed. Because at the end of the day, if you are an investor, you are buying the business. The FAST Graphs™ presented with this article will focus first on the business behind the stock. The orange line on the graph plots earnings per share since 1999. A quick glance vividly reveals the historical operating record of the company.

Aetna Inc. (AET) is one of the nation's leading diversified health care benefits companies, serving an estimated 44 million people with information and resources to help them make better informed decisions about their health care.

This article will reveal the business prospects of Aetna Inc through the lens of FAST Graphs – fundamentals analyzer software tool. Therefore, it is offered as the first step before a more comprehensive research effort. Our objective is to provide companies that have excellent historical records and appear reasonably priced based on past, present and future data and expectations.

A quick glance at the graph itself and the orange earnings justified valuation line will tell the readers volumes about how well the company has historically been managed and performed as an operating business. Simply put, the reader should ask whether this example is worthy of a greater investment of their time and effort based on the data as presented and organized. The FAST Graphs' unique advantage is the graphical articulation of the price value proposition.

Earnings Determine Market Price: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Earnings & Price Co! rrelated Fundamentals-at-a-Glance

A quick glance at the historical earnings and price correlated FAST Graphs™ on Aetna Inc shows a picture of undervaluation based upon the historical earnings growth rate of 10.1% and a current P/E of 11.2. Analysts are forecasting the earnings growth to continue at about 10.5%, and when you look at the forecasting graph below, the stock appears undervalued (it's outside of the value corridor of the five orange lines - based on future growth).

Aetna Inc: Historical Earnings, Price, Dividends and Normal P/E Since 1999

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Performance Table Aetna Inc.

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 8.3% Annualized ROR (without dividend) (green circle), long-term shareholders of Aetna Inc., assuming an initial investment of $10,000, would have received an additional $1,124.33 in total dividends paid (blue highlighting) that increased their Annualized ROR (without dividend) from 8.3% to a Total Annualized ROR plus Dividends Paid of 8.6% versus 3.3% in the S&P 500.

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The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as normal as it has been since 1999.

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A further indication of valuation can be seen by examining a company's current P/S ratio relative to its historical P/S ratio. The current P/S ratio for Aetna Inc is .59 which is historically normal.

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Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1. The rate of change (growth rate) of the company's earnings

2. The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 20 leading analysts reporting to Capital IQ forecast Aetna Inc's long-term earnings growth at 10.5%. Aetna Inc has medium long-term debt at 38% of capital. Aetna Inc is currently trading at a P/E of 11.2, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, based upon forecasted earnings growth of 10.5%, Aetna Inc's share price would $137.98 at the end of 2018 (brown circle on EYE Chart), which would represent a 16.5% annual rate of total return which includes dividends paid (yellow highlighting).

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Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating ! for their! stakeholders over time. Therefore, because earnings determine market price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Aetna Inc to an equal investment in 10-year Treasury bonds illustrates that Aetna Inc's expected earnings would be 5.8 (purple circle) times that of the 10-year T-bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

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Summary & Conclusions

This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure: No position at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A com! prehensiv! e due diligence effort is recommended.

1 Glaring Reason to Sell a Stock

Following the onset of the Great Depression, our country was forced to re-evaluate the way the stock market operated. Realizing the need for an arm of the government to oversee our capital markets, the Securities and Exchange Commission was created in 1934. In its role, the federal body's goal is to ensure a competitive yet fair marketplace that's run in a smooth fashion. To help achieve this goal over the years, the SEC has launched myriad investigations into companies and their business and reporting practices.

These investigations are launched for all sorts of reasons, but one thing seems to have held true, at least in the fairly recent past: that SEC investigations, whether informal or formal, tend to have some seriously gravitational affects on stock prices in the near and potentially long term.  

Evidence of near-term underperformance
A study in 2005 by The Leonard N. Stern School of Business showed that a company's market share declined, on average, by 6.18% and 6.23%, respectively, following the announcement of an informal or formal investigation. It also displayed that the stocks typically underperformed the market for the following three months as uncertainty surrounding emerging information maintained its grasp. However, following those initial three months, the stocks tended to regress toward the mean, leading them to outperform the market. Data was compiled from more than 240 informal and formal investigations from 1998 to 2003.

The latest victim
For a while now, talk has surrounded LINN Energy's  (NASDAQ: LINE  ) hedging strategy and the way it was handled from an accounting point of view. While a select group warned of potential misrepresentation, others seemed to overlook this fact in favor of a distribution that ranked near the top of its industry. These hedging strategies and their representation are now directly under the SEC's microscope, with LINN's distribution payments and acquisition of Berry Petroleum hanging in the balance. As a result, the past two days have been especially hard on investors, with the stock down over 31%. 

Like LINN, many others have come under SEC investigation in the past, and their subsequent performance has been more than lackluster:

Better watch your book
Ebix  (NASDAQ: EBIX  ) , an insurance software company, has been under investigation since last November but had denied these allegations initially. Just 13 days ago, an acquisition deal was called off by an arm of Goldman Sachs after further investigations were announced by the U.S. Attorney for the Northern District of Georgia. The stock reacted to the announcement by dropping 44% and 13% in the two days following as investors sold off. This reaction is justified in the fact that the probe surrounds alleged accounting misconduct.

Improperly hunting for tax havens
While in the midst of reconciling tax-accounting issues, Weatherford International  (NYSE: WFT  ) came under SEC investigation for potentially selling goods to sanctioned Iran and Syria back in March 2012. The stock has yet to recover and has traded down 20.6% since March 16, 2012, while the S&P 500 is up 15% and rival Halliburton is up 23.9% over the same time frame.

Accounting issues have continued to plague Weatherford, along with potential improprieties surrounding Iraqi contracts, resulting in the delay of its latest annual report. All of this follows restatements of its 2010 and 2011 annual reports. Over the past three years, Weatherford has underperformed the S&P 500 and Halliburton by 52.2% and 56.9%, respectively. 

Once the veil is lifted
Molycorp  (NYSE: MCP  ) presents a fine example of what can transpire after the SEC's investigation is complete and shows little in the way of further enforcement. Just last week, the company's shares spiked 10.5% after the SEC completed its investigation into Molycorp's policy of changing its public disclosures and levied no burdensome actions or fines. Unfortunately, this most recent price spike has done little to rejuvenate the rare-earth miner's volatile stock, which stands at just 27% of its year ago price.

Foolish final note
While it may be a bit more difficult for average investors to unearth accounting malpractice within their portfolios, the SEC has a fairly good track record. Even though some investigations might not warrant as much awareness, those surrounding accounting issues can clearly affect a company's market value in a substantial way. Being able to sell shares before or immediately following an announcement might not always be possible (or legal), but investors should certainly consider whether a company deemed suitable for an investigation is worth any space at all in their investment accounts. 

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Ensign Group Acquires Skilled Nursing Facility

Ensign Group (NASDAQ: ENSG  ) has a new asset in its medicine chest. The company announced that, at the end of June, it had closed the acquisition of the Mountain View Rehabilitation and Care Center in Washington state. The center is an 82-bed skilled nursing facility located in the town of Marysville. The terms of the deal were not disclosed, although Ensign Group admitted that the purchase was effected in cash.

Mountain View will be operated by a subsidiary of Pennant Healthcare, which in turn is a subsidiary of Ensign Group.

The deal is part of the company's strategy to boost its presence in the region. In the press release announcing the news, the company quoted CEO Christopher Christensen as saying that "this strategic acquisition, together with our recent acquisitions in Redmond, Wash., further extends our growing footprint in the Seattle area's vibrant health-care community."

Christensen also reiterated that his company is "actively seeking additional opportunities to acquire both well-performing and struggling skilled nursing, assisted living, and other health care-related businesses across the United States."