Opinion

John Wasik

Another key factor for stock investors to watch

Aug 27, 2013 16:32 UTC

CHICAGO (Reuters) – It’s well known that small-company stocks have outperformed large-company stocks in terms of average annualized return since the 1920s, and bargain-priced stocks tend to outperform growth stocks.

Now there’s another factor worth watching: direct profitability.

Recent research by money management firm Dimensional Fund Advisors (DFA) shows a significant premium over time for investing in companies with high direct profitability – and you can adjust your portfolio accordingly to reap those outsized gains.

DFA’s definition of direct profitability is a bit technical: operating income before depreciation and amortization minus interest expense. In non-accounting terms, companies with high direct profitability are expected to have better returns than those with lower direct profitability.

In a paper recently released by Austin, Texas-based DFA, researchers Gerard O’Reilly and Savina Risova found that a group of high-profitability stocks outperformed a low-profitability group in terms of annualized average return by more than 5 percentage points over the period 1975-2012 – 17 percent vs. 11.7 percent.

For non-U.S. developed and emerging markets, the premiums were even greater – 5.4 percent and 6 percent, respectively.

Preferred stocks still make sense for yield

Aug 20, 2013 12:01 UTC

CHICAGO (Reuters) – Frustrated yield seekers have been drawn to preferred stocks because they offer a several-point yield advantage over most U.S. investment grade bonds, including Treasuries, corporates and municipal bonds.

But these quasi-stock, quasi-bond investments act like bonds when interest rates rise: They fall in value. That has brought them some negative attention in the last few months. Preferred stocks declined in value as investors scrambled to find higher-yielding vehicles when rates rose. They may now may be oversold and offer some bargains.

Preferreds straddle a territory between common stocks and bonds. Mostly issued by financial companies, preferred stocks confer no voting rights, but represent a higher claim on earnings than common stocks, and are less volatile.

Will rising rates bring rising stocks?

Aug 13, 2013 16:47 UTC

CHICAGO (Reuters) – For years, the conventional wisdom has been that rising interest rates are no friend of the stock market. A combination of higher costs of borrowing and potential inflation can be a one-two punch for companies and consumers.

But rising rates and stock prices happen more often than investors know, and they can herald brighter economic fortunes in the short term. There are ways to invest in both without getting burned.

This duet has had some off-key news of late because of fears that the U.S. Federal Reserve will curtail its bond-buying program: Bond yields have been rising over the past few months, which depresses bond prices. This has caused a minor shock to income-oriented investors.

Dividend darlings can beat S&P 500 index

Aug 5, 2013 19:23 UTC

CHICAGO, August 5 (Reuters) – When stock-fund managers beat
the market average, often it’s because of a roll of the dice.
Skill may come into play, but only rarely.

Sometimes, though, you can think counter-intuitively and
come out ahead. Such is the case with high-dividend funds that
may avoid loading up on the most glamorous stocks.

Dividends create something of a security blanket around a
stock price. In a market selloff, the stocks with the highest
market capitalization often get dumped and the dividend payers
often stay in portfolios because they promise higher total
returns.

After Detroit, muni bonds are safe, but no slam dunk

Jul 30, 2013 14:29 UTC

CHICAGO (Reuters) – Despite the Detroit bankruptcy and record sell-off of municipal bonds this year, most top-quality “munis” are safe to hold.

If you are a conservative, buy-and-hold investor who wants to temper risk, you might want to stick to the highest-rated bonds from states and localities that do not have looming pension or other payment problems.

Those quality munis offer decent yields and their prices are even more attractive in the wake of the Detroit bankruptcy.

Why emerging markets still offer good stock bargains

Jul 22, 2013 18:05 UTC

CHICAGO (Reuters) – There’s been a lot to grumble about when it comes to Europe and emerging markets this year.

Most of Western and Southern Europe is still trying to dig out of a recession. Economic growth has eased in developing countries. And when the Federal Reserve hinted that it might back off its bond-buying program recently, equities in most emerging markets went into a funk.

But attractive valuations and some palpable signs of rebounds are boosting the fortunes of shares of non-U.S. companies, particularly in the emerging markets. If you don’t have any stake in them, it’s a good time to buy.

Column: Gold still not the best inflation fighter

Jul 16, 2013 14:45 UTC

CHICAGO (Reuters) – As U.S. interest rates have risen, owning gold has been a loser’s game for anyone is trying to hedge against inflation.

Gold isn’t a smart inflation hedge, but many people have been using it that way because they think they have few alternatives.

A low-inflation rate has been punishing to gold investors for the past three months, and the Consumer Price Index has been running well under 2 percent this year. As evidence, the leading gold bullion vehicle, the SPDR Gold Trust ETF, has lost nearly a quarter of its value over the past year as investors continue to sell out of their positions. It was down 23 percent year to date through July 12.

Gold still not the best inflation fighter

Jul 16, 2013 07:59 UTC

CHICAGO, July 16 (Reuters) – As U.S. interest rates have
risen, owning gold has been a loser’s game for anyone is trying
to hedge against inflation.

Gold isn’t a smart inflation hedge, but many people have
been using it that way because they think they have few
alternatives.

A low-inflation rate has been punishing to gold investors
for the past three months, and the Consumer Price Index has been
running well under 2 percent this year. As evidence, the leading
gold bullion vehicle, the SPDR Gold Trust ETF, has lost
nearly a quarter of its value over the past year as investors
continue to sell out of their positions. It was down 23 percent
year to date through July 12.

Column: European stocks beckon as EU turns around

Jul 9, 2013 14:08 UTC

CHICAGO (Reuters) – Buried in a recent avalanche of anxiety over the Federal Reserve and U.S. bond and stock selloffs was continuing good news about European growth.

With euro zone growth expected to return in the second half of this year, buying opportunities abound after the recent global stock retreat, according to Standard & Poor’s Capital IQ analyst Robert Quinn. He expects “fragile growth” by the end of this year as businesses start spending again.

The Continent is still a long way from safe-harbor territory, but its recovery may be on course. A reliable growth gauge known as the Markit’s Flash Euro Zone Composite Purchasing Managers’ Index rose this month to its highest level since March 2012, topping forecasts. In addition, the United States and the European Union on Monday began talks on a free-trade agreement that could boost American and E.U. gross domestic product by $100 billion annually.

European stocks beckon as EU turns around

Jul 9, 2013 11:59 UTC

CHICAGO, July 9 (Reuters) – Buried in a recent avalanche of
anxiety over the Federal Reserve and U.S. bond and stock
selloffs was continuing good news about European growth.

With euro zone growth expected to return in the second half
of this year, buying opportunities abound after the recent
global stock retreat, according to Standard & Poor’s Capital IQ
analyst Robert Quinn. He expects “fragile growth” by the end of
this year as businesses start spending again.

The Continent is still a long way from safe-harbor
territory, but its recovery may be on course. A reliable growth
gauge known as the Markit’s Flash Euro Zone Composite Purchasing
Managers’ Index rose this month to its highest level since March
2012, topping forecasts. In addition, the United States and the
European Union on Monday began talks on a free-trade agreement
that could boost American and E.U. gross domestic product by
$100 billion annually.

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