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Buy, Sell or Hold: The TS&W/Claymore Tax-Advantaged Balanced Fund is a Diversified Profit Play with a High Yield

June 29th, 2009 No comments

By Horacio Marquez
Contributing Editor
Money Morning

Last week was a very important one. The U.S. Treasury placed a record level of debt, the Federal Reserve announced it would not expand its monetary easing, and we got many top players opining about the economy.  In addition, we are facing the uncertainties about ‘Cap and Trade’ legislation and the healthcare reform.  And to cap it all, we are about to close the first half of 2009, with all the consequences in terms of portfolio adjustments that need to take place.

The Treasury debt placement was well received by the markets.   We saw these issues amply oversubscribed and trading well after their placement.  This was very encouraging.  End of the half adjustments also saw a bid coming back into the U.S. dollar.  And, with the Federal Reserve issuing a statement in which they are not expanding quantitative easing further, the ghost of hyperinflation is delayed for the time being. 

With all the slack in the U.S. economy there is no room for manufacturers to pass cost increases on to consumers.  As the fiscal and monetary stimuli become ingrained, this will change.  But for the moment, the great fears of a runaway monetary base have been moderated.

This view is also supported by the commentaries of both Warren Buffet and General Electric Co. (NYSE: GE) Chief Executive Officer Jeffery Immelt.  The oracle of Omaha saw no recovery yet in his numbers.  And Buffett’s group holdings are diversified enough, and he and his management team are as well connected enough, to be ahead of any recovery. 

Similarly, Immelt commented that the underpinnings for a recovery were in place.  And he also observed that China, and some government-driven emerging markets are strong and could be driving U.S. exports.  He did mention that the thrust of aircraft engine orders come from abroad rather than the United States.

In this column, we took early and aggressive advantage, starting last October and December, of low market valuations.  The market did not price then the strong monetary and fiscal stimuli that were devised to bolster the economy. 

Without the Fed’s strong measures and quick actions, we would have fallen into a deflationary spiral and much deeper downturn.  But the Fed’s actions normalized markets one by one; starting at the epicenter, the interbank and money markets, and moving outward in concentric circles through mortgages, and student and car loans.  These actions helped bring the corporate bond markets and the equity markets back to life.

Stocks appreciated the Fed’s effort, as the market shifted its valuation from an “end-of-the world” scenario to a deep recession scenario or better.  But that trade is over. 

As Warren Buffet says and Jeff Immelt implicitly recognize, the recovery will take a long time to materialize.  There are still huge numbers of homes facing foreclosures, and the slack in the U.S. economy is very pronounced.  We need to see some more good news in order to justify higher valuations. 

Ahead of this realization by the market, we have been in profit-taking mode for the most volatile stocks and moved to hold for longer-term recommendations. 

The Standard & Poor’s 500 Index has recognized this and had started moving sideways with a very slight downward bias as of late.  Do not construe this to be bad news.  In fact, the cup-and-handle formation in the S&P 500 usually precedes a sharp move up. 

That is a very distinct possibility that we will eventually be playing with many of our existing ‘Buy’ recommendations, as well as with new ones, should the scenario materialize.  But we need to get over the cap-and-trade and healthcare reform humps. 

If the cap and trade legislation passes, the overall cost of energy will go up, taxing the whole economy, and there will be a shift to renewables, creating many jobs in this industry and ample profits.  We need to see these issues defined before pulling the trigger in most hugely actionable trades. 

So, I started screening different income-generating strategies and I discovered a great way to have both upside with high-yielding, yet low-default bonds, and at the same time enjoy dividends from mammoth companies that are likely to keep paying them: The TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW).

I normally shun from recommending funds.  Why pay management fees when I can come up with a similar strategy on my own and recommend it to you? 

But there are two circumstances that make this case different:

  • When there is such a level of expertise behind the strategy that it would be almost impossible for a non-expert to replicate with a decent chance to obtain similar results.
  • And when the value of diversification is huge, and such diversification is unavailable or almost impossible for the individual investor to obtain.

Both of these reasons are huge factors here.  Let me explain.

Let’s start by explaining what this fund has in its belly.  It can invest from 50% to 60% of the fund in tax-free municipal securities and between 40% and 50% in equities and other income securities.  So we are not only playing the rally in bonds that stand to benefit from the markets’ realization that we are in for a longer recession than expected, that inflation is very subdued, and that the debt placements by the U.S. Treasury were well received. 

It helps the bond market a lot to have seen that the Fed did not continue expanding its quantitative easing.  So why not benefit from this by buying high-yielding, tax–free bonds? 

We are going to get both capital appreciation and a high yield.

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The fund is positioned right now some 54% in munis and 10% in other income. And it is well diversified in 59 strong large caps with an average market capitalization of about $55 billion that pay an average dividend yield of 4.85%!

The key to the strategy is executing precisely in the muni world, given the fund’s higher weight in it.  Also, this very specialized asset class requires detailed credit analysis of municipal and project finances.  The beauty of most munis is that these jurisdictions have taxing power and they are careful to keep their credit ratings. 

In fact, fund’s holdings are 42% in AAA-rated bonds, making it 88% of the bond holdings rated single A or better.  In addition, it has a duration of 15 years, which will be beneficial to returns with a bond rally. 

But as many in the market learned painfully last year, “not all AAA bonds are made equal,” and many went straight to default.  I have known this for a long time and have always done my own research on credit quality, never relying on rating agencies.  Because of this discipline, I was able to get out of Enron, Worldcomm, the toxic-waste-laden structured investment vehicles, and innumerable securities well before they were downgraded to junk.  

So why am I sending you to a muni-heavy fund, at a time that the US municipal and state finances are under such pressure?  Because I know the manager of the fund very, very well.  He is not just your typical fund manager.  He is someone that has been at the top of his class for decades.  He is extremely well known by his clients, issuers, and Wall Street, which grants him top-level access.

I used to work a few offices down the corridor from Vincent Giordano at Merrill Lynch Asset Management and cannot even begin to tell you how much I have learned from him over the years.  He was responsible for bringing the municipal bond management of the firm up to above $60 Billion from $2 Billion by the time he left to start this fund.  He did that on the basis of exemplary and disciplined performance, leveraging the superb distribution network that Merrill Lynch has.  “Vinnie,” as all his friends call him, is the poster-child of discipline, never becoming complacent and always questioning his own assumptions.  This requires inordinate amounts of reading, research and consulting the best sources in the market.  He is a master of risk-reward analysis, which is the key in any investment.

But get this:  The fund is trading at a 12.46% discount to Net Asset Value.  That is, as a closed-end fund you are buying exposure to the securities it holds at such discount to what you would have to pay just to buy them yourself. 

In addition, the fund yield is an amazing 9.50%, most of which is tax free, since it is coming from munis.

Hence, on the back of a very supportive fixed-income environment and to keep a toe in high-dividend, strong large caps, we go for an expertly-managed and well diversified balanced muni-equities fund.

Recommendation: Buy the TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW) at market (**)

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in the TS&W/Claymore Tax-Advantaged Balanced Fund.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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Buy, Sell or Hold: Amazon.com Inc. (Nasdaq: AMZN) Remains Unquestionably Bullish

June 22nd, 2009 No comments

By Horacio Marquez
Contributing Editor
Money Morning

On Feb. 4, I recommended buying Amazon.com Inc. (Nasdaq: AMZN) stock as a long-term play with very important short-term catalysts that were about to unfold.  The basis of the long term recommendation was the fact that I found in Amazon that elusive quality that I was taught to seek in business school a few decades ago: Strong, sustainable competitive advantages.

The analysis played out like clockwork: The catalysts started delivering their bonanza and the stock rallied some 36% in four months.  So, is it time to take profits or do we let it run? 

Let’s reassess both the long-term and the short-term catalysts. 

In the long-term side I see no reason to bail out:

Amazon continues not only to maintain a commanding lead in online retailing, but it keeps building on that lead.  The basis of such expansion resides in price, convenience and innovation.  Price has become a much more important variable to consumers in the recession and will continue to be important in the years ahead, as the battered consumer struggles to rebuild wealth lost in the housing and stock market blow-ups. 

Given Amazon’s size, which gives the company inordinate economies of scale, and its sophisticated systems and distribution network, which allow it to capture such efficiencies, Amazon is virtually impossible for competitors to challenge on that front. Simply attempting to reinvent Amazon’s model and compete against it is a sure way to go bankrupt fast.  This sustainable competitive advantage is here to stay.  What’s more, it allows Amazon to keep expanding market share.
On the convenience front, Amazon again is unsurpassed.  Being able to very quickly find a variety of products online, complete a purchase in just one click (without paying sales taxes in most states), and then have your purchases delivered to your house by an increasingly efficient logistics system in the United States fulfills the initial premise on which the company was founded. 

In addition, the growth in fiber-optic Internet connectivity makes shopping online much faster than it used to be.  And U.S. President Barack Obama’s plan to deliver high-speed Internet access to rural communities will only benefit Amazon further.

On the innovation front, Amazon consistently surprises. Our Feb. 4 article correctly speculated that the revelation of a new, revolutionary Kindle 2 was on the horizon.  Kindle sales shot through the roof. 

I myself bought one, as I had speculated in the article and I was extremely pleased with the result.  I was able to buy the complete works of Charles Dickens for my 11-year old daughter for less than $5, if I recall correctly.  She has been devouring them ever since.  I also bought “The Art of War,” “The Federalist Papers,” a Bible and many other titles for a small fraction of what I would have paid for them in paperback.

In addition, when my daughter made a “mistake” (her words, not mine) and bought some titles using the Kindle 2 online that I did not authorize, Amazon quickly rebated the money with no questions asked. Also, at one point I made a mistake using it and could not see many of the titles that I had bought.  So I called them up late at night using their 800 number and they very quickly and courteously explained how to navigate back to them.  So, Amazon deserves big kudos for its technical support and customer service.  This is another sustainable competitive advantage that will continue delivering customer loyalty and its consequences will be sales and margin growth.

In addition to the success of the Kindle 2, Amazon topped itself.  It soon after launched the Kindle 3.  Now, I must confess that I had the typical buyer’s remorse, since the launch of the Kindle 3, which has a larger screen with better resolution. The fact that it also has and an even more incredible capacity made me wish I held back and bought the new, improved unit. 

Also, Amazon is working together with six universities – including Princeton, where I live –to offer all the books that students require for their studies through the Kindle.  So instead of lugging a huge backpack around campus (short on backpack makers soon?), students are going to be carrying a 19-ounce, 10-inch ultra-slim device with up to 3,500 books, as well as music that can be downloaded in seconds from a free wireless connection and backed up instantaneously in Amazon’s servers at no additional cost.

Soon, I can see road warriors visiting clients carrying all of their product manuals in PDF form, and lawyers and other professionals being able to carry an entire library of reference books, as well as their own work in this compact device.

So I expect Kindle 2 and Kindle 3 to be hot items on the Christmas shopping season this year and to keep growing strongly, transforming the way in which people buy their books, magazines, study and carry reference material easily and cheaply on the road. 

Finally, I have talked at length about “cloud computing.”   This new trend relies on people buying very cheap notebook computers with very fast Internet access and keeping their data and performing their computing on someone else’s servers.  The advantage here is that you own a much cheaper, simpler computer with very little software, and the data and software you do use is safeguarded and constantly updated by the professionals with ultra-sophisticated and efficient operations – like Amazon – for a reasonable monthly fee. 

The trick for this to work, once more is to have high-speed Internet connectivity available nationwide, whether at home or in the office.  As these connectivity functions grow, cloud computing will thrive, taking Amazon to new, unforeseen heights.  But this is a longer-term proposition, much like online shopping took some time to really take off.

Hence, there are short-term catalysts for the upcoming Christmas season. And the long-term proposition for Amazon is unaltered, because all of its sustainable competitive advantages remain in place. 

Recommendation:
  If you are a long time holder, feel free to let your position in Amazon.com Inc. (Nasdaq: AMZN) run and look for much higher prices in a few years.  If you are a short-term player, given the recent stock price rally, you might want to take some profits, based strictly on valuation.   Even though, I expect to see a positive earnings surprise this coming July 15, nobody ever got poorer by taking some profits.  You might want to wait until later in the year, closer to October and November, to add to your position in anticipation of a blowout Christmas surprise from this online retailer (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Amazon.com Inc.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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Buy, Sell or Hold: Time to Take Profits on Diamond Offshore Drilling (NYSE: DO)

June 15th, 2009 No comments

By Horacio Marquez
Contributing Editor
Money Morning

On Monday March 9, barely three months ago, I strongly recommended buying Diamond Offshore (NYSE: DO) as part of Money Morning’s “Buy, Sell, or Hold” feature.

Both the stock and the Standard & Poor’s 500 Index had both hit 52-week lows the Friday before.  But oil had already bottomed three weeks prior, and the lax fiscal and monetary policies of governments around the world seemed almost certain to promote reflation.  Additionally, since the earlier oil bottom, Diamond Offshore stock had been outperforming the market.

Diamond not only had compelling fundamentals, it sported an incredibly high dividend yield, particularly if you combined both the regular and the special dividend payouts. That made the stock a compelling buy.

Not only has Diamond Offshore’s stock turned around since that early-March recommendation, the U.S. stock market as a whole turned around.

Making an investment at a market bottom is a rare opportunity. It is both risky and difficult to try and time the market, but that is precisely what we have done with two of our Buy, Sell, or Hold recommendations. I recommended the iShares MSCI Brazil Index exchange traded fund (ETF) (NYSE: EWZ) on October 27, and the fund went on to appreciate 92% in the subsequent eight months.

Now, Diamond Offshore stock has climbed more than 60% from a March 9 bottom of $54.29 a share, to its current level above $90.

I have consistently advised readers to slowly build stakes in our recommendations over a period of time. And that strategy helps mitigate risk and take advantage of panic selling.  In the cases of the iShares Brazil ETF and Diamond Offshore, we were actually able to boost our profit exponentially by starting our investment at the very bottom.

Diamond Offshore’s special dividend yielded an incredible 13% when we bought it. Since the stock has run up in value, however, that same special dividend has been reduced to a 7.4% yield but remains considerably high.  

As I pointed out in my previous recommendation, Diamond Offshore likely will keep paying the dividend in order to help recapitalize other holdings of its experienced and savvy majority holders. And some analysts question whether this is sustainable over the long-term.  Obviously, Diamond Offshore at some point will depart from this special dividend, but I don’t expect that to happen anytime soon.

Still, with the strong gains that we’ve seen so far, it would be prudent to take some profit by selling half of the position and allowing the rest to ride on a pure valuation and risk-management call. 

Let me explain.

The whole investment was predicated on three general types of factors: Macroeconomic, company fundamentals and the special dividend.  And everything I expected worked like clockwork, without any negative surprise showing up from nowhere to derail our initial investment thesis. 

On the macro side, all the factors we analyzed are playing out as we expected. Oil prices have been very supportive.  This is not only supported by the monetary and fiscal reflationary policies I have outlined but also by strong demand from China.  The monetary base expanded significantly.

The type of massive fiscal stimuli deployed by the United States and China is common knowledge.  And China is doing its part by supporting its economy with massive investment and taking advantage of its $2 trillion in foreign exchange reserves and to gobble up resources at low prices.

On the company-specific side, Diamond Offshore did indeed beat earnings expectations by a mile and expanded margins as we predicted.  This was aided by sharp rebound in oil prices and strong execution on the part of management.

Similarly, the dividends were paid out and the special dividend likely will stay in place for a few more quarters.

But even with all of this upside, there are many uncertainties about the market that are could reinforce headwinds and spur more profit taking.  The Iranian elections could result in a more moderate regime that might ease tensions in the Middle East and allow some rapprochement between Iran and the United States.  This might be conducive to lower oil prices, even though the risks of Iran’s continued pursuit of nuclear weapons under the veil of a nuclear electricity policy will remain. 

The Federal Reserve’s balance sheet expansion and the large issuance of U.S. Treasuries is coming under criticism from many quarters and has already achieved the normalization of many financial markets.  We could see a slowdown in any of these stimuli deployments.

In addition, the heightened risks of inflation, dollar weakness, and interest rate increases in the longer term have brought long-term interest rates up.  Higher rates have already increased the cost of mortgages and put renewed pressure on the already badly hit housing market. Together with higher oil prices, this could put the brakes on future economic growth.  It does not mean that the recovery will stall, but continued increases in job losses, as is typical in recessions will keep damping prospects.

Profit-taking also poses a risk ahead of the earnings season, as the United States and other stock markets have seen strong gains over the past three months.  Should this transpire, we could see a counter-trend correction due to a temporary fly-to-safety into bonds for a while, a strengthening of the U.S. dollar, and a drop in commodity and pro-cyclical stocks.  This could affect Diamond Offshore in the short term.

We must also consider Diamond Offshore’s opportunistic purchase of a semi-submersible unit PetroRig I.  We will not have the price and terms of this deal until closes on or around June 25. 

Some analysts believe that this purchase – or the possibility that Diamond will get more aggressive in serving Brazilian oil major Petroleo Brasileiro SA (NYSE ADR: PBR), also known as Petrobras –could jeopardize the special dividend, but I disagree.  The issuance of a $500 million, ten-year debt placement will cover this purchase and raise the operating and financial leverage of the company, thus raising the potential upside for earnings-per-share (EPS) in this new pro-cyclical bull market for commodities.  And I believe the recapitalization needs of the sister company in the group has some more length to go.

Recommendation: Having obtained already very strong profits, sell half of your holdings in Diamond Offshore Drilling Inc. (NYSE: DO) in light of heightened risks that could materialize. Set a 20% trailing stop on the remainder.  I have little doubt that over the long-term we can expect DO to consistently outperform the market.

(**)  Special Note of Disclosure: Horacio Marquez holds no interest in Diamond Offshore Drilling Inc. (NYSE: DO).

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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Buy, Sell, or Hold: iShares SPDR Gold Trust ETF

June 8th, 2009 No comments

By Horacio Marquez
Contributing Editor
Money Morning

On April 20, I recommended the iShares SPDR Gold Trust ETF (NYSE: GLD). Since then, it has surged more than 10%. And while the price of gold may experience some short-term pullbacks, the U.S. government’s overly expansive fiscal policy could lead to a sharp inflationary spike that makes this exchange-traded fund a must-have investment.

Given the “green shoots” of economic growth that have appeared over the past few months, it looks as though the economy has managed to avoid a very dangerous deflationary spiral.

Indeed, last year’s financial turmoil wiped out major financial institutions, left the housing market in shambles, and sucked all of the air out of an outsized commodities bubble.  U.S. Federal Reserve Chairman Ben S. Bernanke was right to fear deflation.

A deflationary spiral like the one that nearly took root the U.S. economy is the worst nightmare of central bankers, because once you fall into it, you can bring your interest rates down to zero and people won’t put money to work by spending or investing in projects at risk.  Investors realize that by simply sitting on their cash they are actually becoming “richer” since their money buys them more and more goods. 

Central bankers and governments need to react aggressively and preemptively or else they risk losing 10 years of growth, like Japan did when its real estate and stock market bubbles popped in the 1990s.

That it is precisely why the Fed pursued such aggressive monetary policy. Of course, prescribing inflationary measures as a remedy for deflation has its own risks, namely inflation.   Now, since the problem of inflation seems easier to contain than that of deflation, the great temptation is to put the pedal to the metal with both monetary and fiscal policies in order to ensure that the economy responds vigorously.  But then the trick is trying to coax the inflationary genie back in the lamp, so that the recovery is self-sustained.

Weaning the economy off of fiscal stimulus too fast might kill the recovery, but injecting too much stimulus into the economy will entrench inflationary expectations in the economy.  In the latter case, it would require higher-than-needed interest rates for a longer period of time, curbing output.

So, where are we now?

Interest rates are down to are range of 0%-0.25% and the Fed has implemented a number of inflationary programs, such as the Term Asset-Backed Securities Loan Facility (TALF), to make credit once more available and get the economy moving.  In addition, since the Fed Chairman Bernanke cannot reduce rates any more, he has resorted to a policy of quantitative easing. 

Quantitative easing essentially is the practice of issuing money in order to buy assets.  With these programs, the Fed has bought commercial paper, mortgages, and Treasuries.  These programs are all simulative, and thus designed to prevent the deflationary bubble.

Other central banks around the world have taken similar measures to stimulate economic activity.  Throughout the industrialized world, there are different degrees of fiscal stimulus being deployed.  In the United States, Japan, and Europe, governments are saddled with decades of entitlements that cannot be sustained. And, as Milton Friedman reminded us: “Inflation is a monetary phenomenon.”

In addition to the huge weight of entitlements and negative population growth, governments around the world are facing the temptation of resorting to “competitive devaluations.”  This is a situation in which a government deliberately undermines its own currency in order to make the relative prices of its economy more competitive globally.

A country essentially “borrows” growth from its trading partners with the hidden subsidy of an undervalued exchange rate that fosters exports and taxes imports.  But competitive devaluations do not work long term, because they create local inflation and inflation eventually eats away the competitive advantages obtained. That is, unless structural reforms to solve the underlying economic problems that led to the collapse are taken.

Hence, we have the three advanced economic blocks with fiscal and economic trouble incentivizing their economies with lax fiscal and monetary stimulus, and they all secretly would like their currency to fall against that of their trading partners, but cannot say it publicly.  We indeed have a covert “race to be last” between the U.S. dollar, the Japanese yen and the euro.  There’s also Chinese yuan, which Beijing has kept artificially low for about a decade.

To add fuel to the fire, the Chinese and the Russians have been criticizing the U.S. Dollar and calling for some change or competition in its status as the world’s primary reserve currency.  Good luck.  The reality is that the flexibility of the U.S. economy allows it to readjust very quickly in a way that no other economy can. 

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U.S. Treasury Secretary Timothy Geithner has reassured the Chinese about his intentions to withdraw stimulus from the economy as the recovery builds momentum.  And Federal Reserve Chairman Bernanke has testified before Congress that he is determined to reduce the long-term fiscal deficits.  

While I do not for a second doubt their intentions, the reality is that U.S. and global policymakers are navigating unchartered waters, and economies do not change over night. It takes months for monetary and fiscal measures to take full effect.  By the time inflation becomes apparent, it may be too late to change course.

 This is why investors must hedge their bets with gold.

Gold meets all the criteria to serve well as a currency: It is a reliable store of value, a medium of exchange, and a unit of measurement.

Gold is an asset that protects from financial meltdowns.  Witness its performance in 2008, when it was up 5%, while the U.S. stock market was down almost 40%.  And this is without any traces of inflation, but deflation, rather.

In the last few years, with the creation of the gold exchange traded funds, it has become even easier to buy gold, since the small management fee and instant liquidity of the ETF avoids the typical high custodial fees and trading costs associated with physical gold. 

The market capitalization of the iShares SPDR Gold Trust ETF is hitting record highs.  And with the probability that something could go wrong in the global financial system and the risk that some inflation does indeed creep into expectations before policymakers act, investors need to have gold in a portfolio as a diversification tool.

The main reason, again is to cover ourselves from the unexpected global geopolitical risks, and at the same time ensure that we are prepared if inflation rears its ugly head.

The main risk to our investment is the International Monetary Fund’s  (IMF) commitment to sell gold out of its reserves. In fact, the IMF has already made the small concession to China and the Group 20: The IMF will sell 403 metric tons of gold to “provide $6 billion additional concessional and flexible finance for the poorest countries over the next two to three years.” 

These sales will keep a lid on prices for some time and actually create some downward pressure. But that will be precisely the opportunity needed to buy in at a discount. 

The Gold Trust ETF has appreciated some 10% in past three weeks, but ideally we need to see some more consolidation, down to perhaps the $900 levels before we continue to purchase up to our maximum of 5% or 10% of the portfolio, depending on your risk aversion.

Recommendation:  Hold existing gold positions in the iShares SPDR Gold Trust ETF (NYSE: GLD) and add to a maximum of 5% or 10% of the portfolio if we see gold-price retrenchment down to the $900 level (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in iShares SPDR Gold Trust ETF.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

News and Related Story Links:

Buy, Sell or Hold: Campbell Soup Co. (NYSE: CPB) Looks to Profit From its Recent Overseas Expansion

June 1st, 2009 1 comment

By Horacio Marquez
Contributing Editor
Money Morning

Campbell Soup Co. (NYSE: CPB) traces its origins back to 1869.  This company has been around forever, and it has used its time well. 

Campbell Soup has survived and thrived through the Great Depression of the 1930s, both World Wars, and every single one of the challenges and setbacks that the U.S. economy has suffered since.  The magnitude of this accomplishment is almost unthinkable.

I have been following Campbell Soup for almost a decade, mainly as a fixed-income play.  Its reliable earnings and very strong cashflow allow it to pay a very attractive 3.6% dividend, which is very secure, given that it represents just 30% of the company’s earnings. 

Also, this “Old Faithfull-like” revenue stream that grows steadily over time allows Campbell to repurchase stock recurrently, boosting earnings per share.  And the  company’s undisputed dominance in soups and its strong positioning in other products – like Swanson broth and canned poultry, V8 vegetable juices, Chunky chili, Prego and Pace sauces – command almost 25% operating margins, which lead all its peers, including superb competitors like General Mills Inc. (NYSE: GIS), Kellogg Co. (NYSE: K) and H.J. Heinz Co. (NYSE: HNZ). 

The only place Campbell Soup has been lacking is in its growth, but that is about to change.
On May 26, Campbell Soup announced it the signing of a distribution agreement with the largest consumer staples distributor in Russia and Eastern Europe: Coca Cola Hellenic.

Coca Cola Hellenic, which is currently distributing in the Moscow region for Campbell Soup, will enlarge distribution to more than 100 cities and twelve regions across Russia, beginning in August. 

The immensity of this step cannot be missed as the company clearly points out:

“Soup consumption in Russia is more than double that of the United States, where U.S. consumers eat approximately 14 billion soup servings per year. In Russia, nearly 32 billion servings are consumed each year, or approximately 230 servings per capita, which are still predominately homemade, making Russia the world’s second largest soup consuming market after China.”

This comes less than two years after the simultaneous entry of Campbell Soup in both China and Russia.  Since most of those markets are homemade soups, the convenience, high quality, and health-oriented focus of Campbell Soup products will offer the Russian and Chinese consumers a very compelling value proposition. 

We can only speculate about the effects that similar efforts to expand in China, which the company must surely be working on, will have.  It won’t be long before these foreign forays make an impact on growth and margins, and thus the company’s stock price.

Remember that in emerging markets, consumer staples companies enjoy growing populations, growing real income per capita, and an under-served market for Campbell Soup’s products.  It is a profit growth playground.  In addition, the longer winters in much of Russia and in Northern China will decrease the typical seasonality of Campbell Soups sales, only 30% of which are international today.

The stock suffered over the past year, tumbling from its peak of $42.45 share to a recent low of about $25, which is a strong support going back to the 2002-2003 recession and even the year 2000.  The fundamental valuation of the stock is in line with peers, considering the very meager growth assumptions for the industry.  This is where the surprise lies and the catalyst for earnings surprises starting in the second half of the calendar year.

The long term technicals also show the stock oversold and have just turned to the upside, indicating a medium term upside potential to at least $32 a share, a 19% gain excluding solid dividends of 3.7%. 

The company reported last week that its third-quarter profit fell sharply from last year, when it sold its Godiva Chocolatier brand, but its adjusted profit rose 3.6%. Excluding one-time items such as the sale of Godiva, the nation’s largest soup maker earned $171 million in this year’s third quarter, or 48 cents a share, up from $165 million, or 43 cents per share a year ago.

The company also said the strong dollar pushed its results down 4 cents per share. But the dollar rally that lasted for most of that quarter is gone and so were most of the high commodity prices.  In addition, Campbell Soup, given its superb brand loyalty has what most companies envy: pricing power.

Recommendation: Buy Campbell Soup Co (NYSE: CPB) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest Campbell Soup Co.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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