note: This post is a follow up to the New Year post: Four Stocks for the New Year

Its amazing how much can change in just one quarter (especially a quarter like Q1 2009).  When this friendly competition began, markets looked as if they might be recovering from the worst of the financial crisis – we were actually at least two months away from that bottom.  The country had a newly elected administration with high hopes for a new direction.  That new direction has since taken many twists and turns and has at times been quite frightening.

It’s a very good thing that true investment accounts are able to adjust to changing dynamics.  While the four picks I chose at the beginning of the year are now down a collective 24.19%, the ZachStocks Growth Model is actually within a percentage point of the overall market after rebounding from a low that was significantly better off than the low of the market.  (I’d rather miss a bit of the rebound in return for keeping some risk off the table at the low point).

So without further introduction, here are some comments for the four ill-fated positions as well as links to the other far superior contestants…

1. JA Solar Holdings (JASO)
   The excitement surrounding solar as a priority for the new administration has been largely overwhelmed by illiquidity in the credit markets, lower traditional energy prices, and an administration that has needed to spend more energy (and capital) on other more pressing issues.  The environment has simply been hostile for these companies, and in the short-term challenges look very menacing.  However, new stimulus news out of China in recent days has the sector improving and I still believe there is value for solar investors.  Picks that I am more excited about include LDK Solar (LDK) as well as First Solar (FSLR) but JA Solar should still benefit from these trends.
2. AECOM Technology Corporation (ACM)
   Infrastructure was another area that showed promise at the beginning of the year.  Much had been made about Obama’s promise of millions of new jobs created in order to restore America’s aging roads, bridges, federal buildings and more.  AECOM is in the sweet spot of having global diversification, but still having enough exposure to the US to make a difference.  The stock dropped sharply as fast traders bailed when the market was initially weak.  But as prices firm and actual stimulus capital is put to work, AECOM is rebounding and should still perform nicely.  Other names to look at in this sector include Hill International which also provides construction claim and litigation services.
3. TBS International (TBSI)
   It is quite disappointing to see just how weak the shipping companies have been this year.  In late March, the ZachStocks Growth Model threw in the towel on a few of these positions.  (Obviously an argument could be made that we were a month and a half too late – if not more).  The global slowdown in trade has been sobering and there is not much in the way of encouraging signs for this group.  While some companies operate on long-term charter contracts, there is still counter-party risk as the purchaser may choose to break the contract.  In short, there is not much redeemable about this sector and my inclination is to find more attractive investments elsewhere.
4. China Medical Technologies (CMED)
   The stock price for China Med has been extremely disappointing.  However, the business fundamentals of the company are actually still quite sound.  CMED is expected to earn $1.88 this year and $2.08 next year which means that at $13.77 the stock is just over 7 times earnings.  While the growth trajectory may not be quite as robust as analysts expected a few months ago, the strong recurring revenue flow and attractive product line seems to be worth more than the market is pricing.  The company remains a position in the ZachStocks Growth Model and should show relative strength through the rest of the year.

E-Mail Address

So there you have it.  And speaking of the growth model, I have arranged a free one month trial.  This limited time offer allows you to take advantage of the diversified (and flexible) approach to growth stock investing and is easily implemented in your own brokerage account or retirement account.  Why not check it out?  Feel free to read about the model using the link above, but for the free trial, use the sign up button to the right.  This offer will only be available for a select number of subscriptions so act now!

And now to take a look at the competition.  The links below (in no particular order) lead to the other participants in the 2009 stock selection contest:

Intelligent Speculator

The Wild Investor

My Traders Journal

Four Pillars

Where Does All My Money Go?

Dividend Growth Investor

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In December of last year, ZachStocks urged caution on Salesforce.com (CRM) as the stock appeared to be over-priced with an economic backdrop that caused concern.  After the article was published, readers had an opportunity to bag a 27% gain over the next two months as the stock dropped from the mid 30’s to the mid 20’s.

As the current market begins to rally, Salesforce is once again trading at a price that appears unsustainable.  Investors are hopeful that a recovering economy will drive users to subscribe to CRM’s cloud computing offerings which allow companies to use programs that would typically be very expensive to install – on a per user, or per login basis.

The business model is certainly attractive, especially in a difficult market environment where small and large businesses alike are looking for opportunities to cut costs.  The company has seen revenues grow significantly quarter after quarter, and management is very proud to have crossed the $1 billion mark in annual sales.  However, the rate of growth for the company has begun to slow and that may be more concerning than some investors believe.

The last four quarters have seen revenue growth of 52%, 49%, 43% and finally 34% for the last quarter.  Using the high point of management’s guidance for the first quarter, we can expect to see revenue growth of 23%.  Now I know that it is impressive to be growing revenue at all in this type of market, but as investors we need to be aware of this trend of decelerating revenue growth.  Regardless of the economic environment, it becomes much more difficult for a billion dollar company to grow exponentially compared to a younger startup.

Lately some concerns have been expressed regarding the cash-flow trends as well.  Since Salesforce.com receives the majority of its revenue from its subscription and support segment (91.8%), it can be concerning when cash flow numbers begin to drop.  In this case, the company could still report strong revenue for a time as past subscriptions continue to be recognized in subsequent periods.  But it is harder to mask this weakness when looking at cash flow numbers which were disappointing this past quarter.

Deferred revenue is a helpful metric in determining future revenue.  This is revenue customers have already paid for subscriptions.  The deferred revenue came in below expectations which is just another metric that shows how difficult it is becoming to win new business.  Now the company is sitting on $883 million in cash and securities and has essentially no debt.  That should add stability to the company, but does not necessarily justify the extreme stock price.

Management has begun to reduce guidance for Fiscal Year 2010 (the year end is Jan 31).  At the same time, however, headcount is increasing as new sales positions are filled.  The hope is that the additional employees will allow Salesforce to reach out to a broader client base.  But the investment could be risky in such a difficult economic period.

At this point last year, the company was very vocal in its excitement over new financial services clients.  However, these “all-star” clients like Citigroup (C), American International Group (AIG), and Genworth Financial (GNW) are now in the cellar and no longer represent the strong customer base CRM was trying to build.

While Salesforce.com is certainly a strong, viable company; the stock as an investment still looks extremely dangerous.  If I were to apply what could be considered a “generous” 25 multiple to this year’s expected earnings, the stock price would only reach $13.75.  The current price in the mid 30’s just doesn’t make sense.  I would recommend shorting CRM or possibly buying puts to benefit from a drop in the stock price.  Timing could be difficult as the strong market can continue to prop up this name, but over the next 6 months I expect to see much lower prices.

Chance to Short with Spread Trading

An investment idea that allows short selling is spread trading. Choose an asset, decide if it will increase or decrease in value and stake an amount per point on the outcome. A well placed stop loss order can help manage a trader’s risk.

FD: Author does not have a position in CRM
CRM Notes
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I love getting mail from readers.  The email from “horowme” this afternoon seemed worth re-posting for all to read:

Zach,
Could you comment on this article as it relates to your most recent podcast re: positive report on the solar industry and the Chinese governments intention to subsidize installation projects. Does this reported glut of silicon change your opinion regarding the near term changes in solar stocks?
Thanks

The article referenced was a Barron’s Online piece that I can only assume will be aired tomorrow.  The link should be active, but in case they change it, you should be able to search Barron’s for “Nightfall Comes to Solar Land”

Essentially, Barron’s is arguing that new supplies of polysilicon (the raw material used to make solar panels) is hitting the markets at the same time that end demand for solar power is waning.  Three factors are listed which cause solar demand to be light, and this light demand obviously leads to reduced profits for solar panel producers  Here are the factors:

1. Faltering Government Incentives – while governments around the world have promised to increase spending on renewable energy, some programs have been shelved, while other stimulus dollars have taken longer than expected to come to market.
2. Lower Oil Prices – Traditional energy has a foothold on the market.  But high prices of oil and natural gas gave energy users incentives to find cheaper alternatives.  Now that those traditional prices are lower, competition is also lower meaning less is spent on solar development.
3. World Financial Freeze – Access to capital has been restricted for months now.  Companies with plans to purchase solar panels (and thereby reduce their long-term energy costs) simply could not complete many transactions.  So its easy to see how the credit freeze has slowed demand.

Now it appears that all three of these issues are actually quickly improving which could have a big effect on the demand side of the equation.  The latest news out of China shows that the Ministry of Finance is ready to put a huge amount of money behind initiatives to help drive installation of large solar power systems.

Oil prices have lifted significantly off their lows from earlier this year.  While economic news has yet to indicate huge demand for traditional energy sources, a decrease in drilling projects may be having an effect on supplies which yields stronger pricing.

And finally the financial sector is beginning to thaw as crisp newly printed currency foods the system.  Rates are lower and lenders are being given every incentive to put this capital into action.  I expect access to capital will continue to improve this year – but with more responsible lending standards.

Is Low Cost An Advantage?

Barron’s points out that First Solar (FSLR) and Energy Conversion Devices (ENER) operated on a different plane than most solar manufacturers.  Both companies offered solutions that used less polysilicon as a raw material.  While there were some drawbacks (lower energy yield rates), the actual cost per watt of electricity produced was lower.

But now with polysilicon prices lower, that cost advantage is becoming more narrow.  If costs continue to drop, it could become largely immaterial how much silicon is used in production.  And so the technology offered by FSLR and ENER will provide little additional cost savings to end purchasers.

While I don’t argue that lower silicon prices will help traditional solar companies compete on a more level playing field, First Solar should still have somewhat of an advantage.  If demand picks up for solar energy (due to all three of the demand issues improving), we should see poly prices stabilize (or at least not decline as rapidly).  The increase in demand should benefit the entire sector, but low cost producers will continue to turn an effective profit on solar production.

Investments Offer Best Value in Some Time

Even if all the arguments Barron’s points out were accurate and had the expected effect on the solar market, investments in this area could still perform quite well.  This is because the stocks have already largely discounted a negative environment for solar energy.

Many traditional suppliers have dropped 80 to 90% of their value and while First Solar has held up better than most, its stock is still trading for less than half its value last year.  Energy Conversion Devices is less than a fourth of its August level.  Both of these stocks are trading for multiples that seem more than reasonable given their industry leadership and the expected growth over the next few years.

So in summary, I don’t dispute the facts of the Barron’s article, but I think I would come to a different conclusion based on the way the current stocks are trading and the encouraging signs in the industry.

Do you have a question or comment that you would like discussed here at ZachStocks?  Please feel free to send me an email (growth@zachstocks.com) or simply comment on an item asking your question.

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What a day! On Thursday, we saw solar stock prices jump sharply higher in what can only be described as a stunning reversal of fortune. The two solar positions held in the ZachStocks Growth Model were up 12% and 45% respectively, and my actively traded Death Cross Trader service took home 189% gains in a solar related options play.

The move came out of the blue and caught many traders a bit unprepared. Investors sitting on the sidelines quickly realized their cash should be invested in this sector, and short sellers scrambled to cover positions while likely taking substantial losses.

But what actually caused this move? Why such a pronounced reaction? And will this mark the beginning of a new trend, or are we just seeing a “one-day-wonder?”

In order to answer these questions, lets first take a look at how we got to this spot in the first place:

Solar Energy’s Challenging Road

It’s been a difficult last six months for solar companies. Despite a worldwide push for alternative energy solutions, solar stocks have largely taken it on the chin.

The issue has been closely tied to the weakness in the credit markets. After all, its no small thing to set up a 50,000 watt installation on top of an office park or at every retail location.

Prices for solar installation average $5 to $7 per watt. So a 50,000 watt project would cost a cool quarter million. But the good news is that once the installation is up and running, the maintenance costs are fairly low. So instead of paying $5,000 per month to keep the lights on, companies now just use their own solar energy.

So with these theoretical numbers (every situation has its own differences in details) it would take just over 4 years for the savings to cover the cost of installation. And then after that, energy is FREE for the rest of the useful life of the solar installation. Not a bad deal at all…

Can You Spare a Quarter Million?

But there’s just one problem. That initial price tag is quite a large hit. It may make good business sense, but who has a quarter million sitting around to spend on a long-term project? And if you’re putting in multiple locations, the cost is even larger.

In the past, an opportunity like this would be taken straight to Citigroup, Bank of America, Lehman Brothers or any other investment bank. The mathematics work, the savings are tangible, and so a deal could be hammered out in no time. The company might get a reasonably priced loan, or they may sell additional equity to raise the necessary cash. But the bottom line is the deal would get done.

But fast forward to late 2008 and 2009 and all of the sudden there’s no cash to lend. Companies with great opportunities simply couldn’t get a buck to put them into practice. Even though prices of solar panels have dropped (technology has advanced to make costs much more affordable), there still just isn’t a way for most companies to play this game… Until Now!

Ministry of Finance Writes a Blank Check

It’s a bit ironic that one of the biggest pieces of news to hit the markets yesterday, came in the form of a press release that was only available in Mandarin. But thanks to the modern marvel of Google Translator, I was able to read a rough paraphrase of the news item. And the text was pretty surprising… We’ve got a serious turn of events here!

We’ve heard about stimulus plan number one, and stimulus initiative XYZ to the point where the word stimulus has lost its meaning. Heck, I’m sitting here yawning just hearing the word.

But the Chinese Ministry is actually putting action to words by offering to pay $3 per watt for large solar installation projects.  Now remember, these projects typically cost $5 to $7 per watt.  Since we’re talking about “large” solar projects, one can only assume that these project use economies of scale to get the best price (near $5 per watt).

So essentially, China is picking up the tab for 60% of the cost of solar installations. That’s HUGE! It means that our theoretical $250,000 project is now costing businesses $100,000. And still the same energy savings are in place! Instead of 4 years, it now takes less than 2 years to pay for itself.

When you begin to understand the magnitude of this announcement, its actually only surprising that these solar companies didn’t jump more than 45%. In the coming weeks I expect that markets will continue to absorb this news and as a result solar stocks will move higher…   Much Higher!

Credit conditions are beginning to ease (just a bit). China is putting actual cash on the table, and the US has passed several bills that should significantly support purchases of alternative energy systems. All of these forces should result in a long-overdue rebound for the solar industry and significant profits for nimble investors willing to put capital to work in this sector.

To your investment success!
Zach

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I've already updated you on MarketClub's Trend Analysis service (which
I hope you were able to check out) and the video/blog content page, but
today I wanted to give you a heads up as I JUST found out they went live
with their new charting tool. My inside contact over there gave me a
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changes, multiple time periods on one chart, easy to read prices and bars,
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technical indicators, and oh yeah...THEY TALK TO YOU!  Yes the charts literally tell
you what’s going on with the symbol you're looking at. VERY COOL!

Take a few minutes and check out the MarketClub education page to watch
the charts in action: 

Market Club Chart Video

Long-time readers of ZachStocks may remember the days when IPOs used to be priced and profit could be made quickly depending on how deals were trading.  In June of 2008, we urged caution on Verso Paper (VRS) shortly after the company began trading.  In the article we noted the slowing demand for direct mail coated paper, significant competition abroad, a weakening dollar, and shares that were likely to be sold by Apollo Group (the majority shareholder).

Fast forward about 9 months and we see that the stock has dropped from its $12 IPO price to less than a dollar.  And still the company continues to lose money on a quarterly basis.  The fourth quarter saw sales of $1.77 billion but the company reported a net loss of $0.33 cents per share.   The company also noted that they have suspended the dividend on common shares indefinitely – a move which may have marked the bottom of the stock slide.

Profits on our short position have been quite good.  But at this point, there remains little room for the stock to fall, and some encouraging data points are cropping up which may indicate a chance to get involved from the long side.  For starters, the company actually saw pricing increase by 17% during 2008.  Now the price improvement is likely a function of the difficulty in the market and a thinning out of competitors.  End prices are also affected by raw material costs which experienced an “unprecedented cost increase.”

The company has historically shouldered a huge amount of debt which has held the company  back from profitability.  For instance, in 2008, operating income was positive at $62 million.  But once you factor in interest expense of $125 million, the company swings to a major loss.  But management appears to be handling the debt pro-actively and is paying down the balance methodically.  At the same time, lower rates on the company’s variable debt is leading to a break in interest expense.  If the company can manage to continue posting operating profits and paying down debt, there is potential for a recovery.

And finally, the most exciting data point comes in the form of government stimulus.  Verso along with International Paper have begun receiving alternative fuel tax credits for their use of non-traditional fuel sources in their plants.  International Paper has announced the receipt of $71.6 million from the IRS for just a portion of the fourth quarter, and Deutsche Bank expects the company will receive $860 million annually.  The program could be a significant factor in allowing VRS to return to profitability and begin building shareholder value.

Now let me be clear, I’m not suggesting you mortgage your house and put the capital all into Verso.  There are still plenty of variables left to be determined and the interest burden is still high.  But with the potential for up to $4 per share in tax credits, and an improving market, the stock could experience a significant bounce from its depressed state.

If analysts are correct in predicting $0.55 per share of earnings in 2010, this could be a long-term recovery story with a very strong return (percentage wise).  I would recommend closing any short positions and potentially putting some at-risk capital into this dynamic situation.

FD: Author does not have a position in VRS
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After I offered information about MarketClub coming out with the new charts they were flooded with over 12,000 email and phone requests for more info! Yes 12,000! It’s clear that these new charts from MarketClub are really making an impact across our industry.

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Great trading and good luck!

Syniverse Holdings, Inc. (SVR) was hit brutally in the fourth quarter after the Sprint / Alltel merger caused the company to lose one of its largest customers.  In just one day, the stock lost more than 40% of its value as investors grappled with the reality of this loss of revenue.

But in the four months or so since this announcement, the stock has regained nearly the entire loss and appears to be trading in a relatively healthy manner.  In February, the company issued its fourth quarter announcement which sowed pro-forma earnings of $0.39 per share – an increase of 25.7%.  The company benefited from ongoing growth in the mobile industry despite significant weakness in economic conditions.

Syniverse is largely a technology company whose primary service is to offer “interoperability” to various mobile telecom providers.  There are various other offerings such as Network Services and Number Portability, but the majority of revenue comes from the Technology Interoperability segment.  This service is especially critical for smaller mobile companies who need their technology to be able to communicate with larger providers.

Last year the major news was that Sprint/Alltel would insource this function and investors quickly began to worry that other large customers would make the same move.  However, most recently, Synverse signed a long-term contract with Verizon to continue offering the technology.  While the terms were a bit lower than the previous contract (which has cut into SVR’s gross margins), the fact that this large customer will be around for the next three years is definitely reassuring.

Looking forward to 2009, the company has issued what appears to be relatively conservative guidance.  The expectation is for revenue of $460-480 million which is actually below 2008 levels.  But the company made a point of noting that they were able to add 100 new customers in the past year and are currently experiencing a 98% retention rate.  So there seems to be little evidence that any other customers will take the same path as Sprint.

In a research report, Barclays noted that SVR’s visibility is better than other companies within the industry because of the long-term contracts and recurring format of the company’s revenue stream.  While most of the business comes from North America (US and Canada), operations are becoming diversified with customers in the Asia / Pacific region, Caribbean, Latin America, and Europe / Middle East / Africa (EMEA).

Syniverse has been aggressively cutting costs to maintain its margins and is currently on-track to recognize $12 million in synergies from its acquisition of BSG last year.  The balance sheet is relatively healthy with $165.6 million in cash, although the debt burden is $584.8 million.  This should be manageable with the strong cash flow, but obviously the current economy creates more risk for companies with high debt levels.

In short, the stock is still trading at an attractive multiple even given its recent rebound.  Currently the stock is roughly 11 times current earnings and the company is expected to resume earnings growth in 2010.  The technology is a needed service in the industry, and SVR is well known for offering a strong solution and I would expect further contract wins in coming quarters.

FD: Author does not have a position in SVR
SVR Notes
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INO.com would like to give you a FREE preview of its newest service, INO TV.

The preview gives you access to 4 full length seminars by Jack Schwager, John Murphy, Jake Bernstein, and Ron Ianieri. All experts, all well recognized, and highly trafficked by our current members.

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Not long ago, we discussed the merits of Shanda Interactive, a Chinese Internet gaming company which has seen strong growth even during the recessionary environment.  Today we will take a look at another name in the sector which is manufacturing strong profits.

NetEase.com, Inc. (NTES) is actually a bit more diversified than Shanda as the company offers services such as email, instant messaging, personal ads, matchmaking services, alumni clubs, news, personal home pages and community forums.  But despite the many services offered, the majority of profits come from the online game business which pulled in nearly $100 million in revenue just last quarter.

The company offers an assortment of role playing games with Fantasy Westward Journey (FWJ) being the most popular.  The online game portion of the business is extremely profitable with gross margins of roughly 88%.  The company’s advertising business enjoys a 51% gross margin while the wireless services business is yet to post a profit.

Taxation is an important issue that has been hanging over many Chinese companies over the past year.  The government introduced a new tax rate which would be applied to most businesses but also offered provisions for technology companies to be taxed at a preferred rate.  Many companies have applied for this exemption but have not been able to take the lower tax rate until they received approval.  NTES received that approval this past quarter and actually received a refund for taxes paid in excess of what the company owed under the lower rate.  This is not only a nice one time benefit for shareholders, but it also appears the company will enjoy a much lower tax rate for the foreseeable future.

At the end of 2008 the company was sitting on a cash balance of $822.8 million compared to $609.5 million the year before.  Unlike many companies struggling with liquidity in this market, NTES is actually facing the problem of what to do with an excessive cash balance.  The board has approved a share repurchase program, authorizing the company to repurchase up to $100 million of the outstanding shares.  Now authorizations are not necessarily always put into place, but this particular instance appears to have teeth.  The board made the approval on December 12, and by the end of the year, the company had already spent $13.1 million repurchasing shares.

The online game portion of the business should continue to do well in the coming quarters as the pipeline for new releases appears relatively robust.  At the same time, the company is working hard to diversify revenues in order to benefit from its other business lines.  This should allow more stability should one area begin to show weakness.  The diversified approach has the eye of institutional investors and Credit Suisse has named the company as its top pick in the sector.

Analysts expect the company to earn $1.94 in the coming year which could turn out to be conservative if the company continues to purchase shares at a healthy clip.  With the stock trading just below $24, the PE is roughly 12 which appears very attractive for a company with so much growth potential and such a strong balance sheet.  For readers who got involved in Shanda and are now sitting on strong gains, it might make sense to sell a portion of the position and diversify by buying a smaller stake in NetEase.  Both stocks are performing well during challenging times and should only benefit from an economic rebound.

FD: Author does not have a position in NTES
NTES Notes
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I've already updated you on MarketClub's Trend Analysis service (which
I hope you were able to check out) and the video/blog content page, but
today I wanted to give you a heads up as I JUST found out they went live
with their new charting tool. My inside contact over there gave me a
preview and you really need to check it out. No one has better charts then these
right now...period! Click on the chart below to watch a video on how the
charts work:



Here are a few details: Flash based, automatically update with price
changes, multiple time periods on one chart, easy to read prices and bars,
MarketClub's Trade Triangle signals, over 230,000 covered symbols, 23 different
technical indicators, and oh yeah...THEY TALK TO YOU!  Yes the charts literally tell
you what’s going on with the symbol you're looking at. VERY COOL!

Take a few minutes and check out the MarketClub education page to watch
the charts in action: 

Market Club Chart Video

• FOMC buying treasuries and agencies
• Lower Rates, More Cash – Inflation is Coming
• Mark-to-market or Accrual? Arguments for both
• AIG Bonuses – A bit of a different perspective

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Stocks Mentioned:
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Blue Nile Inc. (NILE)
Chipotle Mexican Grill (CMG)
Amazon.com (AMZN)

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New Video: Two Markets, Two Directions (S&P and Crude Oil)

This is a free video from Market Club

In our new video we are going to be looking at two different markets that are headed in two different directions.

We recently looked at the equity markets and alerted you to some very important levels that we thought the markets would have problems with. Those levels have now been reached and it remains to be seen if we are going to see the kind of market action that we were looking for.

View The Video

The second market were looking at is the crude oil market. This market has recently come alive to the upside and bear watching.

This is a short video, but it may contain the blueprint for these two markets. No registration is required to watch this video.

See the Free Video Here

Enjoy,

Adam Hewison
President of INO.com
Co-creator of MarketClub.com

For the first article in this series, please see FOMC Pulls Out the Stops – Part B

Thursday, we discussed the recent move by the FOMC to buy $300 Billion worth of long-dated treasuries along with $750 billion worth of agency obligations.  “B-52 Ben” is flooding the economy with cash and the potential for an extremely inflationary environment is building.  Please use the link above to view the background theory as today’s article deals more with the practical steps necessary to survive and even thrive in this environment.

So without further introduction, here are some portfolio steps you can take to build profits in the face of a falling dollar:

Inflation Strategy #1 – Own Hard Assets

The primary issue with inflation is not necessarily that “things” become more expensive, but that dollars essentially buy less.  But if dollars become less and less valuable, then the primary storage of value can no longer be currency.  During historical inflationary periods, the investors who came out the other side with significant value intact were those that invested in assets that could be stored, had long-term value, and could be easily exchanged.

Now of course gold fits that category, and is actually trading sharply higher on the most recent FOMC news.  Precious metals certainly have their place in fighting inflation, but until the past few years, it has been hard for individual investors to participate.  One of the best tools for small investors is the Spdr Gold Trust (GLD) which is an ETF whose performance corresponds to the price of gold bullion.  You can buy this ETF just like any other stock in an IRA, investment account, and even in some 401(k)s.  Similarly, the Ishares Silver Trust (SLV) corresponds to the price of silver.

Precious metals are not the only investments that hold their value in an inflationary environment.  I also expect the price of oil, natural gas, agricultural products, and other physical goods to increase.  Now remember, the objective is to find situations that store value.  This particular strategy is more about keeping your wealth than sharply increasing it.  I’ve been impressed with the iShares products which include the North American Natural Resource Setor (IGE) as well as the Dow Jones Basic Materials Sector (IYM).  Both of these ETF’s have begun trading sharply higher with our market rally and even more-so with the announcement by the FOMC.

Inflation Strategy #2 – Inflation Protected Securities

There are several “inflation protected” vehicles which are usually indexed to the CPI (Consumer Price Index) or similar measures.  These investments are typically a poor place to put capital into because they offer little real return and instead only protect against inflation.  But during a time when inflation is expected to skyrocket, it may be worthwhile to place a conservative portion of your net worth in such securities to preserve the purchasing power of your nest egg.

A word of caution:  Unfortunately, these vehicles may not always perform as well as might be expected – even in an inflationary environment.  Treasury Inflation Protected Securities (or TIPS) are issued by the US treasury and offer returns indexed to inflation.  But you can see that the government has a bit of a conflict of interest.  Overstating inflation figures would mean that the government would have a larger liability to holders of these vehicles.  Understating inflation obviously is in their best interest.

During 2007 and 2008, the economy experienced quite a bit of inflation from an individual consumers’ perspective.  After all, gasoline was more than $4.00 per gallon, and prices of many important goods were higher due to the input prices to produce them.  As a father of six, I definitely saw increases at the grocery and I’m sure you experienced a tighter budget as spending capital just didn’t go as far.

But according to government statistics, inflation was held largely at bay because of the common “ex food and energy” stipulation.  The rationale was to exclude these items because they were volatile and could send wrong signals to the market.  But last time I checked, food and energy were important parts of every consumer’s budget.  So while inflation protected securities certainly offered investors some return during that period, they did not fully keep up with the increasing cost of living.  This scenario could repeat itself in the coming years so use TIPS with a bit of skepticism.

Inflation Strategy #3 – Fundamentally Sound Growth Companies

They say that necessity breeds creativity – or is it innovation? or invention?  You get the point…  Many of tomorrow’s most successful growth companies are in the formative stages today and are making sound business decisions based on the economic environment that is evolving.  As these companies thrive in the quarters to come (by investing their capital in attractive opportunities, managing balance sheet risk, and properly capitalizing their assets) they will offer us as investors a chance to build our wealth alongside.

Essentially, cash that is not actively put to work will systematically lose its value.  This is true on your personal balance sheet, as well as the balance sheets of growth companies.  Now some would make the argument that debt is a great tool in an inflationary environment because the real value of that debt burden diminishes, while the real value of certain assets remains constant.  However, I think debt obligations should be managed carefully because inflationary environments almost always include significant rate increases which can be extremely damaging to highly leveraged companies.

But small growth companies with creative approaches to making money will not only hold their real value in this environment, but they will create actual gains as profits compound on top of the value of real assets.  At ZachStocks, we will do our best to cover these attractive opportunities as they come public, or as companies make decisions to set up for profits in future quarters.  Our daily posts should help you begin your research as you build a strong investment portfolio.  The ZachStocks Growth Model offers a one-stop-shop for an actively managed portfolio of these growth stocks for you to implement.

Cash is No Longer an Option

If you have held a healthy cash balance over the past 9 to 12 months, let me be the first to congratulate you.  Your wise aversion to risk has likely spared you significant losses.  There is certainly a time for this type of approach and the last few quarters have rewarded conservative investors.

But it appears we are on the precipice of a new environment where for better or worse, risk aversion will not be rewarded.  I don’t want to see you sitting on cash that is decreasing in value in the name of safety.  There’s simply nothing safe about this strategy anymore.

So in the weeks and months ahead, I would encourage readers to put capital to work in various areas that will protect them against inflation.  The United States will pull through this economic crisis.  We will see commerce pick up once again, and jobs will be created.  But unfortunately, inflation will be just as much of a danger as the previous economic recession was.  Protect yourself, and put yourself in a position to succeed.  After all, we never trade “not to lose”, but instead we need to “trade to win!”

Wishing you a good weekend,
Zach

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