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5 Things Every Investor Needs to Know Before Investing in 2012
01/15/2012 12:01 am EST
Say goodbye to 2011 and don't look back. The New Year is here, and before you invest a dime, there are five things you need to know about the market. Once you know what to expect, you can invest with confidence and be on track for market-beating returns throughout 2012. Let's get started.
Know This: The Crowd Is Wrong
The mistake that most investors made in 2011 was that they sold stocks that they shouldn't have because they listened to the panicked crowd, they didn't have a plan and they were afraid they were going to lose it all. But a few (like me) DID beat the market in 2011. When you have the right strategy for this market, you don't have to worry about market gyrations, news out of Europe or if the gridlock in Washington will gridlock your portfolio.
The first thing I would recommend everyone do in 2012 is to not worry about what the market is doing, but to instead focus on their individual stocks. Let's talk about that next.
Know This: Fundamentals Will Rule in 2012
With every stock you buy in 2012, I want you to first ask the questions: Are the fundamentals strong? Are earnings growing?
If you have these fundamentals in place, you'll see that when the market gets volatile, stocks with bad fundamentals will sink like rocks while stocks with strong fundamentals will bounce like fresh tennis balls. The bottom line is that market volatility will make good stocks go down-temporarily. But when the storm clouds part, that's when you'll see bad stocks languish while good stocks soar. Here are the two fundamentals you need to focus on in the year ahead:
Sales Growth: I recommend that you look for companies that are posting a minimum of 10% sales growth on a year-over-year basis. Businesses need to constantly reach new customers or get existing customers to buy more products. Without healthy sales growth you're going nowhere in this market.
Earnings Growth: As with sales growth, you want to see 10% - 25% earnings growth on a year-over-year basis. The thing to know about this fundamental is that "earnings" is just another word for "profits." This is at the heart of all good financial analysis, and I rely on it heavily. As long as a company is able to grow its earnings consistently, its stock will do well.
Following fundamentals is a deceptively simple idea that is too often overlooked. After all, investors are always full of excuses why a company didn't post bigger profits-consumer spending was down, a key contract fell through, you name it. But I'm not in the business of making excuses. I'm in the business of finding companies that are posting bigger sales and profits no matter what the rest of Wall Street is doing. This is the key to succeeding in even the most challenging market.
Know This: European Debt Will Cloud the Market
And speaking of a challenging market, for months we've watched the European debt saga unfold. Despite budget cuts and new policies, Greece has not been able to get a hold of its growing debt. The country's impending default has raised concerns and sent markets reeling worldwide. Even with nations offering assistance to bail out Greece, it hasn't been enough to pay off the country's approximately $500 billion debt.
Greece hasn't been the only European country in the news in recent months. Several, including Portugal, Spain, and Germany, have had their own difficulties. Now that the European Central Bank is stepping in further questions are arising. A debate over allowing the default vs. bailing out Greece's troubled economy is raging. It is uncertain how each scenario will impact the European economy, and all the countries a part of it, in both the short term and long term.
So how does the European crisis impact us across the pond?
Well, we've already seen the weight it puts on the markets. A large part of the volatility they experienced this past summer can be attributed to European economic news. The fact is that US businesses have close ties with European companies, as well as all over the globe. When one region is in trouble, the others feel the sting. Investors become understandably weary when global economic problems occur.
But, it's important that investors remember that investors are reacting wildly to each report out of Europe, sending the market 300+ points in either direction on any news development. What you need to know is that the situation will take quite a while to unfold, but that doesn't mean that you should panic-sell or buy on every move in the market. There are smart investments to make in the current market that will protect you from the volatility, and we will discuss these a little later.
Know This: You Must Buy Dividend Stocks
Right now, the hottest stocks are large cap dividend plays. This is because the volatility that ran rampant in the last few months has caused a flight to quality among investors. They want to load up on big, safe dividend-paying companies-and in a hurry. In a typical year, we would expect the small caps to take off first, but the extreme volatility in stocks changed the game.
Two of the reasons why the large caps are currently winning the market race are because of dividends and corporate buybacks. Smaller companies don't tend to pay dividends. They put all their cash back into their rapidly expanding business. This is a smart strategy for small caps, but with the flight to safety that we just talked about, that makes big, solid dividend-paying companies very attractive buys right now.
The second force working in the big blues' favor is corporate buybacks. When companies buy back their stock, they automatically boost their earnings per share (EPS) for the upcoming quarter. Strong earnings excite analysts and investors and put the company in a better financial position.
I still expect relentless corporate stock buybacks in 2012, as companies scramble to buy back their existing shares and boost their underlying earnings per share before each of the four earnings seasons in 2012.
Know These Stocks
Now that you know what not to do (follow the crowd), which fundamentals to follow (sales and earnings), what's going on in the world market (Europe will continue to dominate the headlines) and which types of stocks are in favor right now (dividend payers), it's time to talk stocks.
I have two plays right now that play into my 2012 strategy perfectly. Let's take a look at each:
Philip Morris International, Inc. (PM) is one of my top dividend picks for 2012. The company boosts a 4.1% dividend yield and a $3.08 dividend.
No to be confused with Philip Morris USA, which is still under Altria, the New York-based Philip Morris International is the premier international tobacco company. PM owns seven of the top 15 tobacco brands in the world, and held about a 16% share of the total cigarette market outside of the US in 2010. Philip Morris' products are sold in approximately 180 countries. PM is a great conservative stock because during bumpy markets, cigarette makers don't get hit nearly as hard as the rest of the consumer goods sector.
Last quarter, the company's net income boomed 30.5% from $1.82 billion, or $0.99 per share, to $2.38 billion, or $1.35 per share. Adjusted earnings weighed in at $1.37 per share, which trounced the consensus estimate of $1.24 per share by 10%! The company posted 26% sales growth and 30% earnings growth.
And, the company is clearly feeling great about its prospects. Company leadership recently announced that Philip Morris is buying back at least $1.2 billion in stock for the upcoming quarter. You should be similarly excited about the profit potential with this company.
Whole Foods Market, Inc. (WFM) is a chain that is dominating the high-end supermarket business. Whole Foods offers a selection unparalleled by other chains: At any of the 300+ restaurants, customers can purchase their usual groceries as well as catering services, nutritional supplements, beer and wine, body care products, books, floral arrangements and household products.
The company recently reported its eighth consecutive quarter of accelerating same-store sales growth. Sales for the quarter rose 12% from $2.1 billion in Q4 2010 to $2.35 billion. This was largely in line with the consensus estimate of $2.36 billion in revenue.
Over the same period, fourth-quarter earnings jumped 31% to $75.5 million, or $0.42 per share. This topped analyst expectations of $0.41 per share by 2%. The board also declared a 40% increase in the company's quarterly dividend; it now weighs in at $0.14 per share. WFM is clearly in a position of strength for the year ahead.
If you want more information on what I think of the investing landscape in 2012, attend one of the upcoming MoneyShow events or, please visit me on Facebook and get your very own copy of my new Free Report: 7 High-Yield, High Growth Stocks to Buy Now.