Debt Free

There are 2 business related news stories in the headlines today that are counter intuitive. The first, “Economy Growth Best in a Year” is balanced with “Stock Futures Flat After Plunge”. Faced with such contradictory news, how do you go about deciding where to invest your hard earned money?

You can do as Warren Buffett suggests, invest in companies as if the market doesn’t exist. Instead, look at the firm as if you were buying it strictly on the merits of it as a business entity. How are its products and / or services? What about its financials and management team. Check its labor relations and any legal issues it may be facing. What about the broader market in which it competes? Is there a strong future demand for its products? I posted some time ago about the affects of new product introductions on a company’s stock price.

For a great example of how a new product can boost a company’s stock price, take a look at Boeing (BA) after they announced the new, highly fuel efficient, 787 Dreamliner. It’s been one of the great, sustained runups of any company in recent memory. I only wish I would have bought some stock as Boeing hovered around $30 a few years ago. As it sits now, the aerospace giant is at $103.70. This rise in Boeing stock price coincided with the announcement of it’s (at the time) 7E7 Dreamliner in early 2003. On March 24^th of that year, Boeing closed at $26.10. The 7E7 was submitted for FAA type certification, one of the earliest stages in a commercial aircraft’s new product lifecycle, in April.

What did Boeing do? They had sustained a fairly consistent drop in stock price for the few years leading up to their eventual climb. In early October of 2000, they closed in the mid $60 range. At the time, they were proposing a new high speed passenger aircraft they called the “Sonic Cruiser”. Obviously the market wasn’t impressed. From that mid $60 level, the stock consistently dropped until late March of 2003, at which point Boeing switched strategies. Instead of betting their future on speed, they chose fuel economy. History has proven that this was the correct strategic decision.

On a related note, Boeing is a great illustration of the potential success of the buy and hold strategy. In early April of 1970, they sat at split adjusted 41 cents a share. $1,000 invested at this point would be worth $251,219 today.

Other ways to invest in the face of such mixed economic news could take advantage of the uncertainty facing the mortgage and home building industries. As lenders drop mortgage products, retrench, or go out of business altogether, and builders look at bleak forecasts for the near term, opportunities lurk for the astute investor (I make no pretense to being one of them). What are your options in such a market?

One possible option would be selling mortgage industry stocks short. Typically, short selling is for the more advanced investors in our midst, so choose carefully. As this industry continues to experience difficulties, the stocks of many mortgage lenders will doubtlessly fall. Some examples include Washington Mutual (NYSE – WM), who at the beginning of this month was at $43/ share, is now at $38. Another candidate even more heavily engaged in mortgage lending would be American Home Mortgage (NYSE – AHM). American was at 18.06 at the beginning of this month, but now hovers around $10. Still another opportunity could be found in Countrywide Financial Corp (NYSE – CFC). This month, Countrywide has fallen from $36 to $29 a share. Homebuilder DR Horton has been dropping since mid-May ($23.75) to their current price of $17.08.  As noted, short selling can be a great opportunity in a declining market, but it can also be very dangerous. You can lose big time if the company, or the industry, should turn around.

There are also opportunities, as I’ve posted about previously, in the distressed real estate market. Don’t forget to look at companies that supply industries that are on the rise. An example would be the construction crane industry. A visit to Las Vegas NV, Bellevue WA, or Shanghai, China will confirm that there’s money to be made in the heavy construction crane business. The Manitowoc Co. Inc. (NYSE – MTW) is a leading producer of those huge construction cranes used in the construction of large, commercial buildings. In some cities there are 12 – 20 of them visible at any one time.

The rise of Manitowoc stock price corresponds to the huge demand for mammoth construction cranes throughout the world. In early April, 2003 they could be had at the bargain (split adjusted) price of $8.45. They are now in the mid-70 dollar range. This is a fantastic rise no matter how you look at it. That $74 is down from earlier in the month when they closed at $85.11. If you were clairvoyant, you could have made a ton coming and going!

The point is that, no matter how you do it, there are always investment opportunities to be found, weather the market and the economy are up, down or sideways. Have a great weekend.