The Rise and Fall of Oil Prices

We’re visiting Colombia this Monday to look under the hood of Houston American Energy Group (Nasdaq: HUSA), a stock that has run 300% since Small Cap Investor Daily reader Bill H. began watching it in July. This $220 market-cap company owns a stake in several Colombian oil concessions and is one of a small number of U.S. listed small-cap stocks with exposure to the emerging economy. In last Friday’s issue of Small Cap Investor Daily, I gave you a brief overview of Colombia, and outlined some of the reasons we’re watching the country for potential small-cap profit opportunities.  

Colombia’s economy had been taking off in the 21st century, but like many countries, its economy faltered in 2008 and 2009. Despite the challenging times, the transformation to a more safe, and open, economy is still intact and foreign capital continues to find a home in Colombia. The country is rich in natural resources and agricultural goods, including coal, gold, sugar, fruits, and coffee. But our interests today lie in Colombia’s vast oil resources that make Houston American an interesting company for small-cap investors.         

Has The Trend Change Already Happened?

Now that another “lower low” has been formed in each of the major indices, we firmly believe that stocks are positioned to make another leg down within the 2-3 months. While short term indicator’s point to a minor rally here, the trend change is nearly complete. Looking at the daily charts of the DOW JONES, [...]

The Health of Nations

If the 18th century Scottish economist Adam Smith were around today, I have no doubt he would have much to say regarding the state of the world economy. The degree to which governments worldwide are influencing markets has surpassed what even modern economists thought was wise just three years ago. Setting CEO pay, influencing hiring and firing of corporate leaders, and issuing debt to fund government investment in public companies is just the tip of the iceberg. I suspect editors of Merriam-Webster’s Dictionary will be struggling to define ‘free market’ in the next revision.

Many governments, ours included, are trying to design a way out of the latest recession. They are crafting complex policies and interjecting in the markets to ‘correct’ problems that have plagued our economy for years: too much spending, too much leverage, and not enough savings.

But these are challenges that many countries have as well. Witness the debt issues in Greece, Portugal and Spain that are driving stocks down today, just days after the Obama Administration released a budget projecting a $1.6 trillion deficit for 2010. That figure will come to 10.6% of GDP, the worst in modern time. So the question must be asked: have government policies become the Invisible Hand that now guides society?

The theory behind the Invisible Hand that Adam Smith spoke of (and the one I prefer) is that if consumers and merchants buy and sell whatever they want and at whatever price they can get, then markets will efficiently divide resources and everyone will benefit. Smith felt government intervention just messed things up. Basically, by acting through their own self-interest, people allocate capital to those areas with the greatest returns.

So what does this have to do with small cap investing you ask? Everything.

Thankfully, we still have some semblance of a free market when it comes to investing in stocks. So investors can freely invest in both U.S. and foreign stocks. And while there are many profit opportunities in U.S. based small-cap stocks, I see tremendous potential in emerging market stocks for 2010.

Job Losses Post WWII Are Bigger Than Ever

Job losses during the Great Recession have been huge and they’re about to get bigger. The labor department is also expected to release figures showing that the jobs shed during the recession are over 8 million. Check out this chart we pulled down showing Post WWII Recessions.

The new data will help illustrate the scope of [...]

Double Money in 11 Years?

Historically speaking – YES! If you look at the long run average of the S&P 500 the after-inflation return of the including dividends is about 6.6% a year. Historically, that number has been about 7%, but thanks to recent economy and 2008 losses it’s come down significantly.

So effectively an investor could doubled their money in [...]

This Exploration Stock Has Potential

We’ve seen strong performance in many stocks in the market over the last two days. Especially strong have been China stocks which moved sharply higher Tuesday on the heels of healthy trade data and robust economic growth expectations. National Bureau of Statistics Chief Economist Yao Jingyuan said China’s economic growth would stay above 8% this year, helping to ally fears of a double-dip recession elsewhere around the globe.  

That statement helped to propel many of the China stocks in the Small Cap Investor PRO portfolio sharply higher. And Lotus Pharmaceuticals (OTC BB: LTUS), which I’ve recommended here in Small Cap Investor Daily, was a top performer,jumping 17% yesterday to close at $1.68.  

I’ve been hammering home one point lately: The market is paying attention to news again. Be sure to remember this, as volatility has increased with investors moving in and out of equities as new news is released. The volatility is creating great buy and sell opportunities for active traders. It’s also presenting opportunities for long-term investors looking to pick up shares in companies they’ve been watching in anticipation of a pullback.

Stock prices will very likely be more volatile this year than in 2009, and we’ve already seen this with a pullback in January. That means it’s going to be even more important to do your research and buy quality stocks at reasonable valuations. It’s also going to be crucial for investors to focus on the sectors that will outperform this year. Of course, all of this will be part of our ongoing conversation here in Small Cap Investor Daily.   

And The Blood Letting Starts

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Conservatism Leads to Higher Share Prices

The phrase earnings quality is a bit of a misnomer. How is one dollar of earnings any better than another dollar? And isn’t quality subjective anyway? In last Wednesday’s issue of Small Cap Investor Daily, Finding Diamonds in the Rough, I said that in a future issue I would review two fundamental analysis metrics, earnings quality and cash flow. Today I’m digging in to the meaning of earnings quality so that you can put this fundamental analysis metric to work uncovering small-cap gems to add to your portfolio.

When I talk about earnings, I’m often referring to earnings per share (EPS), which is net income divided by the number of shares outstanding. Sometimes net income is referred to simply as profit, or even just as earnings.Simply put, earnings are a company’s net profits from operations. There are three sub-totaled line items on an income statement that you should look at:

1         Net income from operations (operating net income): This is the calculated profits including all revenues, minus direct costs and expenses related specifically to the core business. It usually excludes nonrecurring, or noncore sources of income, but history has demonstrated that some companies use a loose interpretation. More on that in a minute.

2         Net pre-tax income: This adds other income and subtracts other expenses from operating income, but it does not include the liability for income taxes. Typically, these adjustments include interest income and expense, currency exchange profit or loss, capital gains and losses, payments or receipts in settled or finalized lawsuits, and other nonrecurring, non-core transactions.

3         Net income: This takes the net pre-tax income and deducts the liability for federal income taxes (state and local taxes are already deducted in the expense section of the report). The tax hit can be a big number. As of 2009, corporations can be required to pay up to 38 percent of their net income in federal taxes.

Depending on the company you’re looking at, certain income items may be worth special consideration. For example, in last Friday’s issue of Small Cap Investor Daily, The Gig is up – This Stock’s a Winner, I reviewed Lancaster Colony (Nasdaq: LANC). Lancaster has a history of receiving cash distributions under U.S. anti-dumping law. This income is accounted for as ‘other income’, and not included as part of operating income.

So when it came time to evaluate Lancaster’s revenue and earnings growth I highlighted the fact that excluding these distributions gave a better picture of Lancaster’s true business growth. And to show how important the difference can be, I found that Lancaster actually increased net margins to 12.7% over the last year. If I didn’t break out the ‘other income’ cash distributions, it looked like the profit margin was just 7%.

Crude Oil Rally Stopped Dead?

Crude oil’s rally was stopped dead today on the recent stockpile news. The rallied which sent crude to a 2-week high at 77.41 after the US reported strong rise in pending home sales – has now lost some steam. Energy prices are now pulling back as they naturally would onon profit-taking. Moreover, API’s report showing [...]

China Bears Should Hibernate

There has been a lot of talk over the last few weeks about how China is a massive bubble just waiting to explode. Well, it is high time for China bulls to push back. All the China bubble chatter misses a number of key underlying elements (I’ll talk about these in a minute). I firmly believe that it is important for investors to have exposure to China equities in their portfolio for several reasons.

A short-term pull back in China stocks like we’ve seen the last three weeks doesn’t mark an end to the country’s remarkable long-term growth prospects. In fact, it just may have presented a timely buying opportunity allowing you to pick up shares of your favorite companies on the cheap.

I recently presented by thoughts on China and a few of my favorite stocks in an investing seminar, China Inc: Understanding China for Outstanding Profits. Just click here to watch the seminar now. In the webinar, I discuss why China’s quasi-corporate structure will continue to reward investors. I also share a few of my favorite sectors and discuss specific stocks in each that have the potential to be big winners in 2010.

Three Green Stocks Set to Pop

Small Cap Investor Daily readers that caught President Obama’s State of the Union Address last week no doubt agree with him on one major point – 2010 is all about job creation. With unemployment hovering around 10%, there are simply too many Americans who are out of work. Not to mention that there isn’t enough tax revenue being generated to cover the county’s operating costs.

For an economic recovery to take hold, we need people to get back to work. The President’s rhetoric on the import of job creation began with a simple statement: “…jobs must be our number-one focus in 2010…” We knew this would be a major initiative once the New Year got underway, but last week Obama reinforced his plan to create jobs for more Americans in the coming year. And a major part of his plan is to increase investment in the renewable energy industry. I have to say, we called it pretty well on November 19 of 2009.

/ES and /NQ Short Term Forecast – Bullish

The /ES and /NQ stock futures are on the rise early this morning after ending January last week with a month’s loss. There is a lot of economic news and earnings to get through today – namely the ISM, personal spending and income and Exxon earnings to name a few. All in all we still [...]