- Published on Tuesday, 05 June 2012 08:00
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
- Hits: 691
The world is overflowing with bad news. But, if you know where to look, there's plenty of good news and a lot of opportunity.
It is harder than ever to make a buck these days. Europe is a mess. America is on the cusp of another recession. China's slipping. And if I had a dog... he'd have run off by now, too.
I figure we could write a cheesy country song... or we could dig for some good news.
My fiddle's in the shop, so how 'bout some good news?
While the broad markets have stunk worse than a chunk of day-old Limburger, a handful of stocks have flat-out surged over the past few weeks.
It's proof there's treasure in every landfill.
Our first gem was easy to spot. In a sea of red, its positive performance demands your eye:
Out of the thousands of stocks I screened, only a few dozen are in positive territory over the past week, month and the past six months.
One of them is Flower Foods (FLO:NYSE).
The company's business is simple. It makes bread and delivers most of it (80%) straight to the store. The other 20% gets frozen and is sent through the nation's warehousing network.
Despite rising input costs (flour isn't cheap these days), the company proves the value of a premium brand. Knowing consumers are willing to pay more for perceived quality, the company keeps branding a top priority. That's how it sends most of its rising costs straight to the consumer and keeps its gross margin at a healthy 47%.
But its real secret is buying the competition.
It won't make the nightly news, but M&A activity in the bakery industry is hot. It's a function of those rising input costs and general consumer malaise. The weaklings are falling apart.
As a brand leader, Flower Foods has leveraged its position to buy its competitors and set the stage for long-term dominance.
If the company is rewarding shareholders in this market... I reckon they'll be even happier when the bulls come out of hiding.
Beating the Odds
Our second market leader, you'll find this ironic, comes from the oil patch.
But InterOil (IOC:NYSE) hasn't handed its shareholders a 24% gain so far this year and 12% in the past 30 days because it's drilling for oil and gas in the frothy rocks beneath North Dakota, Pennsylvania or Louisiana.
Oh no... far from it.
When you buy the $64 shares of this company, you're getting a stake in a company drilling in one of the hottest oil markets you've never heard of -- Papua New Guinea.
At the same time the crude market has gotten crushed, InterOil has jumped from an April low of $50.65 to over $65 this week.
Why? Simple... it gives its oil wells really scary-sounding names -- like Triceratops 1 and Triceratops 2. Rooaarrr...
Or, much more likely, it's because InterOil is drilling in one of the hottest patches on the planet -- with direct access to China.
If you follow the energy sector, you know the majority of players boast share prices that rise and fall with the price of crude. That's because they are producers and not explorers.
Their value is derived through the value of the oil they pump.
But with an explorer like InterOil, its worth is based on the amount of oil it lays claim to... the value of that oil is secondary.
And because the company is working in a region where estimates are few and far between, there is plenty of uncertainty to keep the markets guessing.
Sometimes it doesn't work in an investor's favor... but as InterOil shows, many times it does.
Finally, despite the negative rhetoric from the realm of airline stocks, one of the strongest performing stocks of the past six months is US Airways Group (LCC:NYSE).
The rationale behind the gains of more than 125% is as simple as it is unique. It's all about a potential merger.
Under the thumb of CEO Doug Parker, US Airways wants to buy American Airlines. If the boss can convince the right people, a successful deal would have the fifth-largest carrier take over the operations of the nation's third-largest carrier.
Together, they'd be the industry's top dog... which has been more than enough incentive to keep shares of US Airways headed higher.
These three outliers are proof in a world overflowing with bad news... there's always an opportunity somewhere.
Editor's Note: One investment, which most people overlook, has created some of history's largest and most lasting fortunes. Unfortunately, this investment was so exceptional at creating wealth, the U.S. government outlawed it. Fortunately, there is now a legal loophole you can use to tap into this investment. Get all the details here.
What IS a Hedge Fund Anyway (And Why Should I Care)?
By Zachary Scheidt, Editor, Hedge Fund Strategist
At ISG's recent investor conference in Toronto, I gave a presentation focused on hedge fund strategies -- giving examples of how hedge funds structure their trades to generate very large returns, while keeping risk at an acceptable level.
When we finished discussing the trade setups, several attendees asked me to explain exactly what a hedge fund is and why these funds are so important (and often so profitable). Considering the huge amount of influence these funds can have on the overall market, it is important you understand how hedge funds work.
Regulation, Flexibility and Incentive
There are three things that typically separate hedge funds from more traditional investment vehicles like mutual funds or a standard 401(k) plan.
- Regulations: Most hedge funds are not regulated under the same rules that "public" investment funds abide by. Hedge funds avoid expensive regulatory burdens by operating under a specific exemption. The exemption allows them to sidestep huge regulatory expenses (often saving hundreds of thousands of dollars) but also restricts them to offering the fund only to "accredited investors" (investors with $1 million or an income over $200,000 per year).
- Flexibility: Since hedge funds operate outside the standard SEC regulations, they have more flexibility in how they structure their investments. Many hedge funds use leverage (borrowing money to make bigger market bets), use derivatives and employ "nontraditional" strategies for making money (many of which are covered in my Hedge Fund Strategist service).
- Incentive: In addition to a management fee, most hedge funds charge an "incentive allocation." This means they get to keep a portion of the profits that they generate for clients. You can imagine the best and brightest traders want to run hedge funds because the incentive allocation provides for a much more lucrative compensation arrangement.
Hedge funds often get a bad rap because of their exclusivity -- and also because there have been a number of high-profile hedge fund blowups (like Long-Term Capital Management) in which investors sustained huge losses.
But the real truth is that most hedge funds dramatically outperform "traditional" investment funds that are available to the public.
This is because hedge funds have the flexibility to adapt to changing market environments and can profit from both bear markets as well as bull markets. Typically, a standard mutual fund MUST remain fully invested and has few tools for protecting capital from poor market environments.
The other reason hedge funds outperform is managers are incentivized to make money -- no matter what the market does!
Most mutual fund managers are praised if they only lose 10% when the market is down 15%. When I was a hedge fund manager, I didn't get paid if my fund didn't make money -- regardless of how bad the market performed.
If you're an "accredited investor" and you're interested in investing in a hedge fund, the most important question you can ask a manager is how much capital HE has in the fund. If it's not the majority of his net worth, you should be looking elsewhere. This manager has an incentive to take HUGE risks with your capital -- and he doesn't have much to lose if his own capital isn't at risk.
If you're NOT an accredited investor, don't worry. I can show you exactly how these managers structure their trades, and generate strong profits in all market environments. Take a look at my Hedge Fund Strategist service and you'll see how these top traders stay one step ahead of the market action.
To your trading success!
Chart of the Day: Is It Time to Get Defensive?
By Adam English, Associate Editor, Inside Investing Daily
Payroll data is weak. Job gains for the past two months were revised down. Factory orders are slowing for the second month in a row. Meanwhile, GDP is barely treading water.
Of course, that is just in the States.
All the signs are in place that investors are about to get very defensive... again.
Now that the U.S. economy stumbled, it looks like it may be gold's turn to shine.
After failing to push through a technical resistance at $1,530 just two weeks ago, gold rallied 4.3% on Friday to $1,620. This marked the largest single-day gain in three years.
What else happened on Friday?
For starters, we got a slew of negative reports on the U.S. economy. We got more proof of a weak global economy.
And now, even more bullish for gold, we're getting renewed calls for a third batch of quantitative easing.
Extremely low returns on perceived safe havens like U.S. and German bonds are also helping gold. It isn't hard to justify moving back to gold when bonds returns can't even beat inflation.
"Gold prices appear to have very recently broken away from [a negative correlation with the U.S. dollar] and have turned higher despite further declines in U.S. Treasury yields, which have reached 60-year lows," HSBC said in a recent note. "Low U.S. and German bond yields leave investors with few quality assets to choose from and may benefit gold."
We will see how it works out just by watching the headlines. If more stories show the U.S. is faltering, we'll know that investors will be pressured to move into defensive gold positions again.
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