NPR had a segment this morning that talked about the recent surge in popularity of fantasy investing sites.  These sites allow you to learn and test your trading acumen by competing against other would-be investors without risking real-money.  I’ve talked about Wall Street Survivor in the past, but there are a number of other free simulators, including:

• Marketocracy
• Vvestor
• SimuStock
• HowTheMarketWorks
• Investopedia Stock Simulator
• MarketWatch Virtual Stock Exchange

The features of each vary slightly, so it’s best to take a look at them all so you can pick the one that is best for you.  If there’s a downside, it’s that you tend to make riskier trades since you know the money isn’t real.  However, it’s still a fun way to learn.

There’s no doubt about it:  the economy is a mess.   The job rate continues to rise and it seems like just about everyone is asking for support or a handout from the government.  In addition, it seems like 300 and 400 point drops in the Dow are becoming the norm.

It turns out, however, that there is some good news that could end up having a positive implication for the economy at-large:

Ambac (ABK) is a company that insures bonds.  Traditionally, they’ve provided bond insurance to municipalities as a way of guaranteeing high ratings for those bonds.  Over the past few years, they and their largest competitor, MBIA (MBI) began to insure mortgage debt; and when the market began to tank last year, ABK and MBIA were among the stocks that were hit the hardest…due mostly to the mark-to-market write-downs that they have had to take on mortgage-based assets and the expectation that they’ll have to pay out large sums on the mortgage-base securities that they insured.

This caused a huge problem within the municipal bond industry.  Traditionally, the bond insurers have been extremely stable.  But they’ve seen their credit-ratings slashed in concert with their write-downs, meaning that it costs municipalities and other organizations that use bond insurance more to borrow and insure their bonds.

But here’s the good news:  Ambac announced yesterday that they had reached an agreement to cancel some of those mortgage-based liabilities in exchange for a one-time payment. This will allow Ambac to reverse some of their write-downs and in parallel with that, their credit ratings should also improve.  Ultimately, that will have a positive effect on municipalities, as their balance sheets will also strengthen.

And the best part?  It’s expected that this transaction is just the beginning.  Both banks and the insurers have a vested interest in canceling as much of these liabilities as possible.  As this happens, credit markets will improve.

Over the course of the year, analyst’s estimated earnings for the S&P 500 have been dropping steadily.  Back in March, the average forecast called for earnings of $81.52 per share; and as of October 14th, that forecast had dropped by 41.5% to just $48.52.

If you assume for a moment that Bear markets tend to bottom with a PE of about 10, then that would imply that the S&P could see a bottom around 450-500 within the next year or two – assuming that the earnings forecast doesn’t continue to fall.

Back in the 90’s, dividends and traditional value companies fell out of favor while growth companies were all the rage during the dot-com boom.  But is there value in dividend paying stocks?

The obvious answer is yes, because dividend-paying stocks pay out part of their earnings to shareholders.  However, the real answer goes far beyond that.

Several years ago, a study was done by Fuller and Goldstein that looked at company dividend policies; and how those policies affected stock prices over time.  It turns out that on average, dividend paying stocks outperformed non-dividend paying stocks by an average of 0.37% per month.  And the effect was most noticeable during down markets, when dividend paying stocks outperformed by an average of 0.74% per month.

Another study was done that looked at how stock price appreciation was affected by a raise or cut in dividends.  In situations where a company had a long history of raising dividends, it tended to outperform; and in situations where a company cut its dividend, it tended to under-perform the market

So, dividends do matter.  Not only is it an opportunity for investors to directly share in a company’s profits, but it can also have a positive influence on a stock’s price.

Like many high-tech companies, Intel has taken it on the chin this year.  As of Friday, it's down about 45% for the year.  But does it deserve the haircut it has received? 

Overview

Intel's primary business is supplying the x86-based CPUs used in many of the computers sold on the market today.  According to IDC, Intel held 64% of the desktop market and 78% of the laptop market at the beginning of the year.   And in a JP Morgan research note published in June, it was noted that Intel continued to gain market share against AMD.

What's truly interesting about Intel's core business is that the shear complexity of the x86 CPUs  represent a formidable barrier to entry.  AMD (and to a lessor extent, VIA) are the only companies that have viable alternatives on the market; and as we'll see in a moment, AMD's fundamentals are not nearly as attractive as Intel's.  VIA has only a tiny fraction of the market.  Other companies such as Cyrix and Transmeta have attempted to enter the market, but have failed to be competitive.  Of note is a recent $622 million investment in AMD by the Abu Dhabi government.  However, this cash infusion won't put much of a dent in AMD's $5+ billion in debt.

In addition to CPUs, Intel also produces graphic chips and flash memory.  Over the past year, Intel has grown its share in graphic chips to 47.3%; whereas NVIDIA has 31.4% of the market and AMD follows up with 18.1%.  In the flash memory space, Intel controls about 5% of the market share, but it also only represents a minor portion of their overall business.

Investment Thesis

Over the past 5 years, both Intel and AMD have grown their revenue; but they differ dramatically when you look at earnings, cash flow and debt load.  Intel has maintained a relatively consistent debt/equity ratio of about 0.05, whereas AMD's debt/equity has grown substantially over the last couple of years.  In addition, Intel has delivered earnings and cash flow on a more consistent basis over time.

It's interesting to note that Intel's price/earnings averaged 21 and price/cash flow averaged about 11.5 between 2004 and 2007.  However today, both ratios are down about 45%.  At these levels, the market has priced in large declines in Intel's future revenue.  Current analyst projections, however, suggest that next year's earnings will grow by close to 7%.

In summary, Intel's core business is difficult for competitors to crack; providing it with a strong leadership position and the ability to deliver consistent, high-quality earnings.  At current prices, Intel appears to have been unfairly maligned by the market.  Given the current turmoil in the market, I would wait until market momentum turns before buying Intel.  However, when it rebounds (and I believe it will...) I think it's reasonable to expect that it could hit $22 to $27 per share. 

I’m a big proponent of practicing a new stock strategy (a.k.a “paper trading”) before I commit actual money to it.  I recently ran across an interesting site called Wall Street Survivor, which provides a free platform that you can use to not only paper-trade potential strategies, but compete against others to win prizes and recognition.  And at the same time, you can see what trades top players are making.  All in all, it’s an interesting way to learn by doing without risking any money…and the best part is that it’s free.

Link:  Wall Street Survivor

There’s no doubt that the stock market has been tough over the past year.  All three indicies – the Dow, the NASDAQ, and the S&P are all down over 30%.  In an economic downturn, there are some safe havens, however.  Think of companies that produce products that are necessary for everyday life:  consumer staples, utilities, healthcare  And with it now appearing that the economy is going to bump along in the doldrums for at least another year, it’s a good idea to remain defensive. 

With that in mind, I’ve been looking closely at a company that:

• Focuses on oral healthcare and has a market share of close to 44%
• Has a history of steadily increasing dividends
• Is projected to continue growing, even with the prospects of a softened economy
• Has handily outperformed the indicies by approximately 20%

The company?  Colgate Palmolive (CL).  The investment thesis is fairly simple:  Even in a bad economy, people still have to brush their teeth; and when they do, they tend to gravitate toward name-brand products.  At its current price of about $65 per share, CL is undervalued by about 20%.  And until the stock market recovers, you can enjoy its dividend yield of about 2.5%. 

The market downturn has not been kind to Google.  It hit a high of nearly $750 back in November of last year.  But since that time, it has fallen by nearly 50% to it’s after-hours price of $389.

And yet even with the economy in turmoil, Google managed to turn in some solid numbers, with earnings well above estimates.  With Google commanding over half of the search market and making money off of almost everyone through Adwords and Adsense, they’re arguably the 900lb gorilla of the search space.

But is it a buy at this price?  Well, with their current cash flow, they’re tracking to hit about $7 billion in free cash flow on an annualized basis.  With their current enterprise value of about $100 billion, that means that the stock is trading for about 15 times cash flow. At that price, it’s probably valued about right.

I’ve mentioned Jim Cramer on this blog in the past, both here and here.  And while I’ve always looked at his rants with mild amusement; some of his schizophrenic ramblings leave me perplexed; and I wonder if perhaps he’s doing more harm than good.

On the Today Show this morning, Jim cautioned viewers to take any near-term holdings out of the market. 

"Whatever money you may need for the next five years, please take it out of the stock market right now” he said.

Sure, fine.  Any funds that will be needed on a near-term basis shouldn’t be invested in risky investments anyway.  However, it strikes me as interesting that while Warren Buffett appears to be following the old adages of “Buy low, sell high” and “Buy when there’s blood in the streets” with his investments in Constellation Energy, GE, and others; Cramer has shot into a sheer panic and is running for the hills.

Time will tell who is right; but if it were my money, I would wager on Buffett.

So far this year, the major indices are all down by over 20%.  It’s gotten so bad that a lot of us don’t even open up our retirement statements when they arrive in the mail.  So what’s the smart money doing? 

They’re buying up beaten down stocks.

Following the old adage of “Buy Low and Sell High”, Warren Buffett’s Berkshire Hathaway has recently taken big stakes in Goldman Sachs (GS) and General Electric (GE); and recently agreed to buy Constellation Energy at a fraction of its recent high of over $100 per share.

And he’s not the only one.  Anthony Bolton, described by some as the “British Buffett”, recently purchased shares for the first time in two years because he believes that valuations are among the cheapest he’s seen in years.