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Foreign Stock Pick Of The Day
Bloomberg had an article yesterday about “where the next crisis will come from.” The list included unsettled politics, problem banks and growing debt.

Guess what? That’s a woefully incomplete list. But don’t expect me to complete it because the truth is we don’t know what the next crisis will be.
Part of the reason that crises hit markets hard is that they’re unexpected. Few people anticipated the housing market crash that led to the financial crisis nearly a decade ago. In 2011, when China and Brazil were fueling world growth, no one expected both countries to be reining it in just a few years later. And less than three years ago, energy execs were partying it up as crude oil was well over $100 a barrel with no expectation that it would soon crash.

The point is problems hit the markets with sudden force. As investors, our job is to prepare to pounce.

Sometimes bad news is followed unexpectedly by good developments. When Congress and the White House surprisingly agreed to boost defense spending again last fall—after three years of cutbacks that were part of the so-called budget sequester—the stocks of small defense contractors soared.

I jumped on one called Arotech (NSDQ: ARTX) on Dec. 17 when the shares were at $1.87; by April, the price was at $4.05. The company makes simulation programs for military and civilian pilots as well as high-performance batteries for U.S. and foreign militaries, and my research found a cutting-edge provider poised for a huge influx of orders.

The next crisis—or opportunity—isn’t known. But we do know that smart research can uncover stocks and other investments on the verge of benefiting. When market shakeups occur, as they inevitably will, we’ll be ready to exploit them.

Right now, few markets are exhibiting the kind of opportunities that the energy sector provides. And Robert Rapier, chief investment strategist of Investing Daily’s The Energy Strategist, has the deep industry knowledge to identify them—and to know when to pounce.

His system includes “energy skimming,” reaping profits from imbalances in supply and demand across the energy spectrum. These are short-term trades that rack up gains without requiring long-term patience. Over time, they can add up to big bucks.

Short interest in Twitter (betting that the stock would fall) fell precipitously just before its recent decline. Twitter, the social media/messaging app known by its bluebird silhouette, raced up almost 40% to $25 earlier this month on takeover rumors. When the buyers failed to appear, its wings were clipped and it fell hard and swift back to $17. Unfortunately for the bears, they had removed a large chunk of their bearish bet just before the stock fell.

Such is the life of a short seller. I spent 25 years shorting stocks and this scenario is sadly familiar. While short sellers must be correct that the fundamentals of a stock are unwinding, it is equally, if not more important, that they be accurate on the timing of the short bet.

The abrupt rise of Twitter’s stock shows how just seven days of poor timing can produce a mountain of losses for a short seller. In addition, a short bet carries unlimited risk which can wipe out even the most experienced trader. For these two reasons subscribers of my Profit Catalyst Alert newsletter will see that I recommend put purchases on the stocks I am most bearish on.

The short interest in a stock is measured by the percent of shares trading that are sold short. For Twitter, the short interest fell from 7% of total shares on Sept. 22 when the stock was $23 down to less than 4% on Oct. 5 when it began its downward spiral.

Most traders, who were likely underwater with their bearish bets, were forced to buy back or “cover” as the stock raged upward and their losses mounted. This forced covering is often known as a short squeeze, a term sounding oddly affectionate but is morbidly painful for those on the receiving end.

Twitter has been a particularly difficult short. The company has lost anywhere from $79 million to $162 million per quarter since early 2014 and has never earned a dime. The stock traded on hype and dreams of future profits, an elusive hope for a company with geometrically expanding expenses.

Although a serial money loser sounds like a dream short, a stock like this can be most difficult for the bears. If the bulls are totally comfortable with Twitter losing money for an indefinite period of time, the bears had to look elsewhere for news that would disappoint bullish investors.

That number was revenue growth, which has slowed dramatically for Twitter. The stock’s biggest decline came in June 2015 when revenue growth dropped from 100% to 74%. Yet even after that drop the stock jumped 50% for a short period.

Luckily for the bears, the Chicago Board Options Exchange (CBOE) is continually adding longer term options (called LEAPS) and more frequent expiration dates for an increasing number of stocks.

Most shorts feel lucky if they can narrow down the timing of a stock’s decline to a two quarter period. With even the smartest analysts out there working with such a wide time frame, buying puts that expire 6 months out will often capture the expected plunge of a stock.

Like anyone who survives in the woods eating raw meat, most bears are tenacious and wily animals. Short selling is surely not for the faint of heart but with sharp claws and a cap on losses it can produce tremendous returns.
AT&T’s proposed $85.4 billion deal to buy Time Warner is the latest and largest mega-media merger. It won’t be the last.

Here’s why: AT&T andVerizon make their money giving customers high-speed Internet service at home, pay TV channels and, in some cases, Internet access to mobile devices.

The shorthand labels for these services are broadband, cable and wireless.

These are GREAT businesses. Demand for their services has been growing for years. But they’re not what customers actually want. They only provide access to what people want.

Broadband and wireless remain strong and growing businesses, although their growth will slow when they reach saturation of their markets – that is, when pretty much everyone who can afford broadband and wireless has it.

But cable has exhibited strong growth, as viewers’ desire for movies, shows, sports, news and other video content is insatiable – and cable is able to meet that demand with more channels, including premium channels, and pay-per-view offerings.

Yet there is a dark cloud lurking over the cable industry, in the form of a question that haunts cable executives like a waking nightmare: what if consumers could get access to all this great video content, in the comfort of their own home, without cable?

And that’s exactly what’s starting to happen.

Drinking at Home
Imagine a law that says you can only drink liquor in a bar. AT&T, Verizon, Comcast and other such companies are like bar owners in that scenario. They’re making money hand over fist because they own the only way to access what people want.

Now imagine the law is changing to allow people to buy liquor in stores and drink it at home. What would those bar owners do?

They’d try to own the liquor, right? That way they can get paid no matter where people choose to drink.

The fact is, there’s now compelling competition for pay TV, in the form of online video services. If you can watch your favorite shows online whenever you want, and stream live events such as sports and breaking news, why do you need pay TV at all?

That’s why cable providers need to own content. That way they get paid no matter how you watch it.

Comcast recognized this several years ago and snatched up NBC-Universal (and, this year, DreamWorks Animation). Now AT&T wants to do the same with Time Warner.

Verizon has chosen a different path so far, acquiring AOL and Yahoo! to boost market share in online and mobile advertising (another way to profit from people watching video in new ways). They’re also created Go90, a mobile video service that captures some of the emerging market for non-cable video. But I wouldn’t be shocked to see cash-rich Verizon looking to buy more content providers over the next few years.

So if as investors we want to own the liquor, not just the bar, we need to focus on content providers who know how to attract viewers. In recent years, that’s been companies like Time Warner, Disney, YouTube, Netflix, Amazon Prime – and many other small players who may be acquisition targets.

Netflix (Nasdaq: NFLX), for example, has a market cap right around $55 billion – similar to Time Warner’s market cap of $61 billion before the AT&T deal was proposed. The stock is expensive right now, thanks to a 20% run-up after announcing better-than-expected earnings last week.

But it’s made smart moves to become a creator of original content, including hit shows such as “House of Cards” and “Stranger Things.” And it’s a go-to source for movies, documentaries, old TV shows and other licensed content.

You better believe someone at Verizon is spending a lot of time looking at Netflix right now.

After all, that’s what consumers are doing.
For most people, owning dividend-paying stocks is like going to the dentist: you do it because you need to, not because it’s fun.

But dividend-paying stocks are now the only decent option for income investors in this era of low-yielding bonds and no-yielding money markets. In the yield desert we live in, a 4% dividend yield is manna from heaven.

But behind the boring façade, dividend stocks are actually kind of sexy. And they can make you rich.

Not to brag, but I will: Investing Daily has top newsletters for dividend investors. Our Utility Forecaster is routinely ranked among the top newsletters by Hulbert Financial Digest. And we also have powerful portfolios of top dividend stocks in Canadian Edge and Personal Finance as well. In fact, Personal Finance just added one with a yield that tops 7%.

Now I know you’ve heard about the benefits of dividend reinvestment … the power of compounding and all of that. I won’t waste your time on the theory.

But when was the last time you sat down and did the math? Do you truly understand how powerful reinvested dividends can be?

I know, you hate math. So I’ll do it for you.

The Math

Let’s assume we buy 200 shares of a $50 stock for $10,000. The stock yields 4%, or $2 per share, every year. We reinvest all dividends into purchases of new shares. Let’s further assume that the share price goes up 5% a year and the company raises its dividend 5% a year – reasonable assumptions for the high-quality stock with solid cash flows that we recommend.

In fact, share price appreciation of 5% per year is a conservative assumption given the historical performance of our portfolios. (For the purpose of this example, we’ll assume we reinvest dividends at the end of each year, and we won’t take commissions or taxes into account.)

Two observations:
  • Your $10,000 investment turned into $23,993.04 after 10 years. That’s a total return of 139%, or an annualized return of 9.1%. That’s well above average for the stock market over time.

  • The stock’s dividend in Year 10, $3.26 a share, represents a yield of 6.5% on your original share price. In effect, you’ve turned a solid 4% yielder into a high-yielding stock. In a few more years, you’ll be raking in a double-digit yield on your original investment.
As this shows, dividend-paying stocks can form the foundation of a wealth-building portfolio.

Most of us also invest in growth stocks that can provide a lot more capital appreciation – including some more aggressive picks for explosive growth. But when you have a chance to pick up shares of solid-yielding blue chips like Boeing (NYSE: BA), Duke Power (NYSE: DUK), Pfizer (NYSE: PFE) and Verizon Communications (NYSE: VZ), do it.

Even better, get one or two of our newsletters with powerful dividend portfolios, and be introduced to a slew of perpetual-motion, dividend machines that don’t often make the headlines.
The machines are taking over.

We were impressed when a supercomputer became Jeopardy champion, but now the machine revolution is hitting close to home: a self-driving truck just delivered a shipment of beer 120 miles through Colorado; the just-in-case human driver never lifted a finger (and we are assuming he didn’t crack a cold one).

Yes, there are other headlines now, as in the assault on Mosul and apparently some political contest, but the fact that people aren’t more amazed by this is in itself freakin’ amazing.

Self-driving cars have been road-tested for a few years, but this news demonstrates the feasibility of this technology for long-haul trucking. That’s a game changer, and it’s only the latest evidence that, yes, we’re headed for a world in which robots take the place of more humans for many jobs that we thought were safe from our machine overlords.

Robot use in factories is nothing new; it’s a major reason for the decline in U.S. manufacturing jobs as productivity increases. While it’s unfortunate for the workers who lose their jobs, it’s inevitable as machines that can perform tasks quickly and precisely, without ever tiring or making mistakes.

More than 250,000 industrial robots are in use globally. They’re especially common in making cars, electronics, metals and chemicals, and they’re increasingly used in the energy, military and medical technology sectors. Robots now perform about 10% of tasks in heavy industry; experts say that will rise to more than 20% by 2025.

Even as robots are used more in industry, their use is going to explode in areas where they need to interact with humans – including driving cars, but also many other areas that once raised safety concerns. Thanks to innovations in sensors and artificial intelligence, it’s no longer necessary to isolate robots from people. New technologies, such as high-strength materials and longer-lasting, more efficient batteries, are also helping drive down costs.

And as human-robot interaction becomes common, more companies will invest in it. According to Boston Consulting Group, total spending on robots is growing at a 10% annualized rate, from $15 billion in 2010 to $67 billion in 2025.

If you’re looking for a relatively safe way to play the fast-growing robotics trend, you can’t do much better than Swiss conglomerate ABB (NYSE: ABB).

One of the major industrial controls suppliers in the world – and a global leader in robotics – ABB makes YuMi, a two-arm assembly robot that can work safely side by side with humans and costs only $40,000. As a major supplier to the power generation, energy and other industrial sectors, ABB is poised for solid growth as China, India and other huge emerging markets invest heavily in infrastructure over the next decade.

ABB and other companies feeding this growing market will have the wind in their sails for years to come. And the stock also works as an income investment; the company’s balance sheet and cash flows are strong, and ABB currently yields a healthy 3.4%.
Regardless of what you might think about Cuba’s politics, thawing U.S.-Cuban relations are creating the potential for big profits from the island.

For the first time since 1961, JetBlue flew a scheduled flight between the U.S. and Cuba this week. The last time that happened, passenger planes still had propellers, people still dressed their best to fly and you could smoke on planes. That’s just the latest development in thawing U.S.-Cuba relations, which have included a state visit from President Obama and a reopened U.S. embassy in Washington.

Cuba may seem economically inconsequential, but with 11 million citizens it is the most populous country in the Caribbean. It also has a literacy rate higher than our own and its economy has been growing at a rapid clip, posting GDP growth of 4.7% in the last half of 2015. And despite tales of grinding poverty, with GDP per capita of better than $10,000 it is wealthier than many other developing countries, including India and Vietnam, despite decades of American sanctions.

American investors are anxious to salsa in the streets of Havana. Unfortunately, thanks to its communist government and the state-ownership of most enterprises, Cuba doesn’t have a stock market. Still, there are ways to profit from Cuba once again opening its doors to Americans.

One of the easiest would be to buy shares of Copa Holdings (NYSE: CPA), a leading Latin American airlines. Based in Panama, it’s hardly a fly-by-night operation with a market capitalization of more than $3 billion. It also already operates regularly scheduled service to Cuba and will definitely benefit from the surge in Cuban growth that American investment should create. The shares also yield about 2.7%, so you can get paid as you wait for things to really take off.

If your broker allows you to trade on Canadian exchanges, Sherritt International (TSX: S) is a miner which already has extensive operations on the island. Through a partnership with the General Nickel Company of Cuba, Sherritt mines and refines nickel in Cuba and is also exploring for and developing local oil and gas reserves. Like Copa it’s not a pure play on Cuba though, with operations in Canada, Madagascar, Spain and Pakistan, but nearly 60% of its revenue comes from the island.  It’s a risky bet though, with a market cap of just $235 million and it has been hard hit by the decline in commodity prices.

Probably the easiest way to bet on Cuba is the Herzfeld Caribbean Basin Fund (NSDQ: CUBA). A closed-end fund, it holds a basket of 56 stocks likely to benefit from a resurgence of American investment in Cuba, ranging from cruise lines and airlines to banks and infrastructure companies. Keep in mind that the fund is small and it typically CUBA Fundonly trades about 20,000 shares a day. That said, it tends to make big moves on any news about U.S.-Cuban relations. And right now it’s trading at a 7.7% discount to its net asset value, meaning its share price is lower than the value of the stocks the fund holds. It has typically traded at a nearly 3% premium over the past three years, so this looks like a terrific entry point.

Granted, something might yet derail our increasingly cozy relationship with our island neighbor and that would certainly ding all three of these stocks. But if things keep moving in the right direction, I expect they’ll all move up as Cuba benefits from growing U.S. investment.
Bankers have been in the hot seat thanks to a wave of scandals, ushering in the departure of Wells Fargo’s (NYSE: WFC) CEO and driving Deutsche Bank’s (NYSE: DB) share price below even financial crisis levels. On top of that, while revenue and earnings at most of the major banks have been topping analyst expectations, they’ve also generally been down compared to last year. The Fed dragging its feet on interest rates has depressed bank profits, and what growth there has been has mostly come from trading and fees, as evidenced by the recent earnings reports.

A big problem, though, is that banks have also been dealing with some unfamiliar competition over the past few years. Financial Technology (FinTech) companies, which aren’t traditional banks despite being subject to many of the same regulations, are disrupting payment systems, money management and even lending. On the loan front alone, FinTech outfits like LendingClub (NYSE: LC) are gobbling up market share. While they only financed a few billion dollars’ worth of loans in 2013, it’s estimated they made between $20 billion and $40 billion last year. Many analysts believe that the FinTech share of the lending market will continue to grow and could hit $90 billion by the end of the decade.

As FinTech takes a bigger and bigger bite out of the $3.5 trillion consumer lending market, banks are starting to feel the pressure. That especially true since FinTech lenders also make a lot of loans to lower-credit borrowers which, while carrying more risk, also tend to be much more profitable.

FinTech outfits are also cutting into what were once reliable revenue streams for by banks by launching new payment services serving merchants, who are often frustrated by all the paperwork involved in setting up new systems. On top of that, banks also charge fees for their services which quickly add up and it can often take days for merchants to collect monies charged to credit cards. There are several FinTech firms out there streamlining those systems and, since they don’t have a big infrastructure of other services to support, can do it more cheaply.

Wealth management is another area where FinTech is taking a big bite of what was almost solely the purview of banks. Instead of going into a bank and talking to someone in a business suit who may be biased towards steering you into one of the bank’s proprietary funds, you can download an algorithmically developed “robo-advisor” app on your phone and invest without ever talking to a human being. A bevy of robo-advisors have shot up, ranging from Betterment and Folio to Wealthfront, most of which are cheaper and less hassle then dealing with your bank.

They also have a lot of appeal to millennials who, after the financial crisis, have developed a distrust of traditional wealth advisors and buy into the idea of index investing. My generation is also notorious for always having their phone in their hand, so offering investment management through an app makes it almost irresistible.

Although there isn’t firm data on just how much money these systems are managing – most are private and don’t have to report that kind of information – considering how many major banks and other financial players are buying them up is a clear indication that they’re the wave of the future. Over the past couple of years Northwest Mutual has acquired Learnvest, BlackRock bought Future Adviser and Vanguard, and Fidelity Investments and Charles Schwab have each launched robo-advisor services of their own.

So, banks aren’t just fighting a battle against bad PR or struggling against stagnant interest rates. They’re also fighting against the disruptive effect of technology, which is only going to get worse as FinTech grows and matures and will continue eating into bank’s traditional profit centers. None of this is to say that banks are an inherently bad investment – I own a few banks stocks myself – but growth is going to be much harder to come by in the future.
The stock market didn’t like the latest October Surprise any more than Democrats did.

Last Friday there was a brief, but we think, unmistakable sign that investors overall prefer Hillary Clinton, who has pledged to maintain many of the policies of President Obama. Or as Donald Trump once described them, “the job-killing, tax-raising, poverty-inducing” policies of President Obama.

On Friday the market sold off after the release of FBI Director James Comey’s letter to Congressional leaders regarding emails related to Clinton’s private server.

The selloff was sharp, but hardly panicky. In fact, it was short-lived: the S&P 500 has climbed higher, fitfully, since Friday afternoon. As this is published on Monday afternoon, the market is flat.

Maybe the economic report released on Friday had something to do with the market comeback. The Bureau of Economic Analysis reported real GDP increased at an annual rate of 2.9% in the third quarter—beating estimates of 2.5%. That showed the recovery may (these numbers often get revised) have moved from tepid to good. Before the Great Recession the average GDP was about 3%.

And job growth and wage growth are also good, other fundamental signs investors take to heart.

Certainly we’re stomping the Eurozone, which is almost flat lined at 0.3%.

In any case, Friday’s quick-twitch reaction to bad news for Clinton indicates the fear many investors have of a Trump presidency. No matter what you think of him as a candidate, there’s no question that he is less predictable than past presidential nominees – and investors hate uncertainty.

That Wall Street has factored in a Clinton victory is confirmed by everyone from Citigroup predicting a Clinton victory with a 75% probability, to important prediction/betting markets, such as PredictIt, giving her a victory by a wide margin (though some have nudged down since the Comey letter).

And a September Wall Street Journal analysis of campaign donations showed that no Fortune 100 CEOs had donated to Trump’s campaign, while a third had supported Mitt Romney four years ago.

The market clearly has been treading water for weeks. It’s arguably overvalued and vulnerable to a selloff. Yet the better-than-expected economic growth and third-quarter earnings reports have kept stocks afloat.

So we think the smart money shouldn’t be shocked by a selloff on Wednesday, Nov. 9. In fact, we recommend raising some cash now for bargain-hunting in the days after the election.

And remember that stocks have risen during Democratic and Republican administrations, in all kinds of economic and political environments. There’s plenty of ways to make money even during corrections, bear markets and sideways markets. At Investing Daily we’re increasing our options recommendations to help our subscribers do just that.

We think if there’s a post-election selloff next week, it likely won’t last long. Investors love to look at politics, but in the final analysis they look at individual opportunities and value them based on the underlying fundamentals.
ConocoPhillips (NYSE: COP) is my former employer, and it also happens to be the world’s largest independent exploration and production (E&P) company based on proved reserves as well as production of liquids and natural gas. ConocoPhillips operates in 21 countries and, given that scale and breadth, I always pay attention to its quarterly results.

The latest quarterly numbers were announced last week. Before delving into them, let’s review the history of the company.

ConocoPhillips was created by the merger of two integrated oil companies, Conoco and Phillips. “Integrated” means they explored for and produced oil, transported it to their refineries and refined it into fuel and petrochemicals for sale. The companies merged in 2002 to become the fifth-largest publicly traded integrated oil and gas company. But then in May 2012 ConocoPhillips bundled up the refining, petrochemical, and midstream assets (mostly pipelines and storage) and spun them off into Phillips 66 (NYSE: PSX). This left ConocoPhillips as a pure oil and gas producer.

The plunge in oil and gas prices hit ConocoPhillips pretty hard, while Phillips 66 excelled because refiners tend to benefit from low crude prices, trading out of sync with their suppliers. The share price of Phillips 66 doubled within a year of the spinoff, and over the past two years marked by the steep downturn in oil and gas prices PSX is up by 5% while COP is down by 36%.

Needless to say, ConocoPhillips’ performance has been disappointing, even in comparison with rivals. Among its peers, ConocoPhillips is one of the few to have a negative total return this year (down 3.7% year-to-date). In contrast, EOG Resources (NYSE: EOG) is up nearly 30% this year.

One of the reasons COP has lagged EOG, among others, is that it has a lot of high-cost production around the world. The company has also been spending a lot of capital for projects that were already in the pipeline when the price of oil crashed. As a result, it has struggled to generate free cash flow, and this forced the company to slash its dividend a year ago after previously assuring investors that it was safe.

The recently announced third-quarter results suggest the company is finally turning a corner.

ConocoPhillips has now reported lower capital expenditures for eight straight quarters. At the time of the downturn in oil prices in mid-2014, COP was spending more than $4 billion per quarter. In the latest quarter, the company’s capital expenditures fell below $1 billion. At the same time, COP reported an 18% decrease in year-over-year operating costs, and a 4% increase in adjusted production (to 1.557 million barrels per day) compared with the same quarter in 2015.

As a result, the $1.2 billion the company generated from operations was more than enough to fund both the quarter’s capital expenditures and the dividend. This was the first time that has happened since the downturn started. ConocoPhillips still reported a net loss of $1 billion given its substantial depreciation writeoffs, but it handily beat consensus estimates and nudged its annual production estimate up and capital spending budget down.

Expensive deepwater projects have long weighed on the bottom line, but the company is in the process of curtailing such capital-intensive efforts. ConocoPhillips’ past free-spending ways certainly left it in a deep hole once energy prices fell, but given my expectation of higher oil prices in 2017 — along with continued spending discipline — the next year should prove to be much better than the last two.

Investors seemed to agree, pushing up the share price 5% the day of the earnings announcement. But are these changes enough to start buying? Join us at The Energy Strategist to get our current recommendation on COP as well as EOG and other portfolio standouts.
Good to know it.....

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