1) Remember that there is no perfect solution, and there are no completely “safe” investments. Diversification is an attempt to manage risk by spreading out the risk among different assets.

2) The services of a good financial advisor are important. Their job is learning about everything having to do with personal financial management. They can answer your questions and give you sound advice; as long as you pick a good one.

3) You’ll want to divide your stock holdings among several different sectors. Having too much money in a single industry, such as healthcare or technology or real estate, could be disastrous if something bad happens to that group of stocks.

4) Most people will tell you to buy mutual funds. However, mutual funds have fees, often on average do no better than the indexes, and are harder to get in and out of. Though they do sometimes have tax advantages. Talk to you your financial advisor about holding ETFs instead. ETFs trade like stocks but are attached to specific indexes instead. For example, if you think biotech is an industry with good long term prospects, there are several biotech ETFs that track the movement of 20+ stocks all in one asset.

5) Beyond stocks, it’s a good idea to hold CDs, and bonds as “safer” investments, and many people recommend at least 5% of your portfolio go into precious metal related investments. Since early 2000, the price of gold has gone up over 400%.

6) It is possible to be too diversified however. This is where fundamental and technical analysis comes in learning about Sector Rotation techniques can seriously improve your portfolio.

2) Develop a good strategy. Have all your rules set in writing so you don’t even have to think about whether or not to take the trade when you see an opportunity.

3) Find a good broker. Use a broker that’s always available, has good fill times, and it well respected in the industry. Talk to friends and read reviews online to find the best one for you.

4) Only use money you can afford to lose. Remember that you’re not always going to win, in fact, especially when you’re starting out, you’ll probably lose a lot, so only trade with what you can afford to lose. This will also help you make better, rational decisions.

“General Environmental Management (GEM) assists its clients, which may include government entities, commercial and industrial clients, educational institutions, and other environmental service providers in the Western United States, in meeting regulatory requirements for the disposal of hazardous and non-hazardous wastes.”
-from GeneralEnvironmental.com

GEM (which trades under the symbol GEVI.OB) has recently made some exciting additions to its business model. Formerly just a waste removal company, they are now moving toward a treatment driven business model. The margins of this new venture for them are in the 35-40% range, as opposed to approximately 5% where it was before.

“GEM has been providing a premium level of environmental solutions to clients in the Western Region of the United States for over seven years…”
-Timothy Koziol, Chief Executive Officer of GEM.

Clean water is in diminishing supply, so the need GEM’s treatment facilities will continue to grow. GEM’s plans for building a network of treatment facilities and providing a full range of environmental services for its clients are expected to drive greater future profits.

COMPANY FACTS

Website:
http://www.generalenvironmental.com/

Incorporated Year:
1990

Float:
3-4M

Shares Issued:
21,995,153

Stock Agent:
Colonial Stock Transfer

Recent News:
General Environmental Management Implements New Business Model to Drive Profitability and Higher Margins

“The water industry domestically is a $120 billion market and growing with increasing demands from industry, government and consumers. Globally the water market, which exceeds $400 billion, is third in size behind only power generation and oil. Diminishing world water supplies will only aid the Company in securing more non-hazardous wastewater business in the future…”
-Timothy Koziol, Chief Executive Officer of GEM.

This message is part of a paid advertisement from The DreamTeam Group and should not be considered an investment recommendation. It has been complied from publicly available sources of information.

I suspect that was the case over the last month or so with aerospace and defense stocks. Prior to unveiling the requested military budget for 2011 (2010’s has been in place since last October), many investors were convinced that progressive Democrat President Barack Obama would slash military spending. Surprise - he wants to spend more in 2011 than he did in 2010, after 2010’s total ended up being bigger than 2009’s number [2009's total was George W. Bush's call.]

Good news for defense contractors? You bet. In fact, I’d almost say the expanded budget alone makes them investment-worthy….particularly at a time when consumer dollars are expected to run dry again soon.

The thing is, these names were already investment worthy in their own right; defense stocks (and I mean defense much more so than aerospace) are among the most attractively-priced equities you can find anywhere right now. Even if the 2011 defense budget was contracted - and it still may be – it would be a modest contraction at best, and the bulk of these companies would still be just fine.

Specific names? Check out the grid below, with which I’ve tried to hone in on the defense names specifically, and weed out the aerospace-heavy or aerospace-exclusive stocks.

It doesn’t take long to recognize that some of the stocks are just undervalued. And now, thanks to President Obama, thanks to the looking defense budget, the number should more than justify higher stock prices for the next couple of years.

Just a thought about one of the few (and I mean very few) pieces of economic data that actually means something.

As far as timing goes, the chart of the S&P 1500 Aerospace/Defense Index pushed off its 100 day moving average after the pullback, and made the move on strong volume. The selling volume was never that strong to begin with either. So, if you’re on board with the general idea, now’s not a bad time to start wading in.

S&P 1500 Aerospace/Defense Index

This is a case, however, where I probably wouldn’t opt for an ETF like the iShares Dow Jones U.S. Aerospace & Defense Index Fund (ITA). Rather, I’d go fishing for a low P/E name with strong margins and growth…. maybe something like Alliant Techsystems (ATK) or CPI Aerostructures (CVU). Your call.

Why the interest? Because that’s where most of our stock trading ideas are going to come from.

Just a quick explanation…. these EPS estimates are built on the assumption that the index is a company itself, consisting of one share. More importantly, the red lines are the actual earnings per share, except when framed by a yellow highlight, which indicates it’s a projected value.

The horizontal blue line is last quarter’s (from whet we know so far anyway) earnings per share. I plotted it primarily to show you where operating earnings stand in relation to where they used be. In both cases, we’re close to 2007’s and 2008’s operating earnings levels… an encouraging sign.

In any case, here’s a look at the S&P 600’s aggregate results.

S&P 600 Small Cap Index, With Earnings

And, here’s a look at the S&P 400.

S&P 400 Mid Cap Index, With Earnings

It’s an interesting reality check, as many investors have convinced themselves that no company will ever turn a profit again. Not only will they, they actually have been! While I still feel the 2010 EPS projections are too aggressive, in light of the real results we’ve seen in 2009, they aren’t completely out of line.

On that note, you should know these numbers are based on operating results, and not GAAP results… which is where all those ‘one-time charges’ can take a toll. The actual GAAP results data isn’t available at this level, but based on the divergence between operating and GAAP results that I’ve seen for the S&P 500, I’d guess that the actual GAAP/reported earnings will be rolling in at about 30% below the operating results you see here. Prior to 2007, that disparity was only on the order of about 5% to 10%.

Still, even if the true bottom lines for these companies are only about 2/3 of the earnings estimates we’re seeing here, that’s still something worth investing in.

None of this will halt the short-term pullback that was set into motion last week, but this is bullish in the bigger picture.

The decision has been met with a few responses… some pleased, most lethargic, and a few passionately dissenting voices. It’s the latter group I find most interesting.

In short, the biggest critics said:

1. It’s a bad deal because he paid too much for it, for too little return.
2. It’s a bad deal because railroads are a 20th century relic built on coal shipping, which is on the way out.
3. It’s not within his normal ‘value’ rules of acquisition.

At first I was more in tune with the dissenting ideas than in support of the Oracle’s choice. As I continued to study things though, I think I uncovered what Buffett is seeing.

In the same order listed above….

1. There’s not a lot of ‘value’ in it, but it is a revenue bearing operation that makes a profit in good times and bad.
2. Coal is 40% of rail shipping volume right now, but only 20% of the industry’s revenue. And, that 40% is indeed shrinking… on a relative basis. Non-coal (intermodal) shipping is not only on the rise in the near-term, but is expanding greatly in multi-year timeframes. It’s wildly more cost effective than trucking, and will grow as the economy rebounds, and unless oil falls to under $50 per barrel (or so) again.
3. True, BNI is not in his normal value scope, but he knows it. He just can’t find anything else to buy, but doesn’t want the cash to sit idly. That said, many of his utility businesses can benefit from his ownership of rail lines; it can make his overall conglomerate more profitable, if not drive lots of profit directly.

Now, all that being said, rail’s revival is for real. Check out the drastic plunge - and strong recovery - we’ve seen in railroad volumes over the last four years in the United States.

U.S. Railroad Volume - 10/2009

Now check out the same for Canada.

Canadian Railroad Volume - 10/2009

Buffett’s not grasping at straws here – demand is picking up. It’s been flying since May, and the trend is still solid. We’re not to last year’s levels yet, but we’re on the way. (Just bear in mind there’s a November/January lull.)

So what? The stronger the economy is, the greater oil prices rise. The greater oil prices rise, the more business Burlington will have. Even if coal goes away (which it won’t anytime soon – it powers 45% of this country’s electricity generation), it won’t matter since intermodal transportation is growing so well, and will do so in the future. 2009 was a big blip, but the rail traffic is recovering – the data verifies it.

As for BNI, that’s a done deal. However, the same upside that Buffett seen in BNI, I see in companies like Canadian Pacific (CP), and Canadian National Railway (CNI). Both do a big intermodal business, and neither rely on coal a great deal. Even a tepid global recovery could full rejuvenate our northern neighbors’ materials business (to and from).

Bottom line, I like the railroads at current prices as long-term holdings. Buffett was right – it’s a bet on a U.S. recovery. He just didn’t do the explanation justice, as the payoff of railroad stocks with a recovery could be enormous.

Our ‘edge’ here is the likelihood of an earnings beat. Though last quarter was en exception, over the prior three quarters, Telefex topped income estimates… by quite a bit in a couple of cases. The company was a penyy short last time around $0.88 versus $0.89), but the analysts still boast a strong track record of underestimating this machinery engineering company.

As for the timing, our chart says it all. We got an official buy signal last week with the move above a major resistance line, though this is the second signal since May. (The first was negated by the exit signal from September, but clearly that exit was an errant one.)

Teleflex (TFX)

To that end, I’ve decided to do some aggregating work to define something I know plays a role in sector rotation, but something I’d yet to actually put on paper. In short, I’ve laid out the ‘average’ sector leaders during various stages of the market and economic cycle. That’s the image you see below.

A couple of thoughts…

First, yes, I know the market’s cycle isn’t synchronized with te economy’s cycle. That’s because the market trades about 6 to 9 months ahead of the economy. (That’s why I consistently ask the question “Do you think stocks actually trade at what they’re worth?”. They don’t.)

Second, while I love models and tendencies since they give me an edge, I hate exceptions, and I suspect there are plenty of them to this model. That’s why I have no intention of abandoning my current sector rotation methodologies, since they’re based on reality (emerging momentum) rather than history (which is assumption); I think the right answer is probably somewhere in between the two.

Anyway, the table should be of some value to you, but I would caution against making it something of tremendous value. I’ll certainly incorporate its themes, but I get married to nothing.

Market, Economic Cycles