Best stocks in 2010 and 2011

My best performing stocks in 2010 (performance since they were bought) were:

SUNRISE SENIOR LIVING INC (SRZ), 2015 % (yes, a 20 bagger!).

CITIGROUP INC (C) (bought post Lehman Bros. crisis) + 130 %

FEDEX CORP (FDX) + 121 %

PANERA BREAD CO CL A (PNRA) + 114 %

UNIVERSAL DISPLAY CORP (PANL) + 86 %

WHOLE FOODS MKT INC (WFMI) + 85 %

For 2011, my picks (that is, what I am buying now) are:

LIFE TECHNOLOGIES CORP. (LIFE)

NATIONAL GRID (NGG)

WISDOMTREE TRUST EUROPE SMCP D (DFE)

VERIZON COMMUNICATIONS INC COM (VZ) (mostly on the opening up of the iPhone to other carriers in the U.S.). However, Apple (AAPL) is still too rich for my taste, and will probably suffer with Steve Jobs leave of absence.

I also agree with some of Motley Fool's picks for 2011, in particular:

Altria Group (MO)
Dendreon (DNDN)
Gammon Gold (GRS)
Intuitive Surgical (ISRG)
Range Resources (RRC)
Valero Energy (VLO)

But definitely not Yahoo! (!)

Happy hunting!

Impact of capital gains tax on U.S. investments

The reduced 15% tax rate on qualified dividends and long term capital gains is currently scheduled to expire on December 31, 2010.

Unless the U.S. Congress extends the reduction (which seems increasingly unlikely, given the lack of a bipartisan consensus on this and other tax reduction extensions), this means that in 2011, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket; and the long-term capital gains tax rate will be 20%.

All eyes will be on the lame-duck session of Congress after the November 2 elections. Even though President Obama and the Democrats have indicated this is one tax reduction they might consider extending (as well as the tax reduction for those earning less than $200,000, or $250,000 for couples filing jointly), it is possible that gridlock and partisanship will set in.

Thus, if you have been considering selling shares or other investments that have a considerable capital gain, it might be to your advantage to do this before December 31st.

There is a similar situation with the estate tax, which will jump from 0 % on Dec. 31st to 55 % on Jan. 1st, barring Congressional action. Other than emulating the plot of "Through your Momma off the train", the only option to get around this is through a donation, which is taxed at a 30 % tax rate.

It is possible that avoiding the increase in the capital gains tax will lead to a significant bear market in the coming two months in the United States, as investors rush to sell before the tax increases. Of course, if the fall in the share price exceeds the difference in the tax rate, it would not be to your advantage to sell.

How to buy shares in Facebook, Zynga, Groupon, ICQ and other new stars

The hottest social networks and other new media stars have not yet launched an IPO (I am talking about companies like Facebook, Twitter, Zynga, LinkedIn, etc.).

However, there are two ways to buy pre-IPO shares:

1. Through the secondary market, as this Financial Times article spells out. You have to go through private equity firms, through investment funds, or through a secondary market, such as SecondMarket.

2. Or, you can buy shares in companies that, in turn, own shares in such new companies. Some examples are Microsoft or Google, but a greater exposure can be had through mail.ru Group (formerly known as Digital Sky Technologies), which itself will be launching a London-based IPO for global depositary receipts on the LSE under the ticker ‘MAIL’. mail.ru Group holds 10 % of Facebook, owns ICQ, and has large stakes of shares in Zynga, Groupon, and Russia’s biggest social network, vKontakte.ru

Further details on the MAIL IPO in techcrunch.

Interesting IMF study on housing prices

Interesting IMF study on housing prices.

In particular:

house prices in the United States and other advanced countries have already undergone substantial corrections since 2008. So in most countries, house prices have moved much closer to their economic fundamentals (see Chart 3). Our econometric estimates indicate that if the remaining adjustment were to happen over five years, house prices would fall modestly—an average annual rate of between 0.5 percent and 1.5 percent.

For countries such as Spain and Ireland there is an additional reason to expect slow recovery. In these countries, the construction sector grew much more rapidly than other sectors of the economy and became the engine of growth. The housing bust has thus brought severe contraction in construction output and employment. The unemployment rate is now three times its 2000–07 average in Ireland and twice its 2000–07 average in Spain, compared with a 20 percent increase on average among euro area countries.

... and problems in the housing market and the labor market are intertwined: U.S. states where the house price bust was more pronounced are also where employment has fallen the most

(that is, Nevada, Arizona, Florida, California).

In sum, in my opinion, prices should fall a little in the U.S. (particularly in States with high unemployment, and in which the prices have not fallen as much yet, such as Michigan and Rhode Island), and more in Great Britain, Austria, France and Spain (where the actual adjustment has been significantly less than the IMF-predicted adjustment).

Great magazine on Latin American Investments

Looking for information on investments in Latin America, I came across this fantastic magazine: "Alternative Latin Investor"

http://www.alternativelatininvestor.com

In the most recent issue (No. 6, September 2010), these articles might be of particular interest:

Infrastructure
Municipal Bonds in Latin America

Emerging Markets
Investment Flows and Stock Market Returns

Art
Pinta: The Contemporary and Modern Latin American Art Show

Philanthropy
Ashoka: Inspiring and Supporting Tomorrow’s Leaders

Renewable Energy
Opportunities in Argentine Biodiesel

Hedge Funds
The Spectrum of Investors for Latin American Hedge Funds by Merlin Securities

Goldman's VIP list

Fascinating list of stocks predominantly owned by hedge funds, prepared by Goldman Sachs.

The Goldman Sachs 'Very Important Positions' list aggregates the top 50 positions held by hedge funds that utilize fundamental investment strategies.

Among those new additions to the list this quarter are: Tyco International (TYC), Cognizant Tech Solutions (CTSH), Barrick Gold (ABX), Viacom (VIA.B), Covidien (COV), Freeport McMoran (FCX), Covanta (CVA), Davita (DVA), Schlumberger (SLB), US Bancorp (USB), Halliburton (HAL) and General Electric (GE).

Several of them are gold and mining-related.

High-yield dividends

I came across this excellent note on companies with a high-yield in dividends.

Many of the companies are REIT or Business Development Companies (BDC), which are required to distribute most of their earnings in the form of dividends.

Among those mentioned are:

Company Yield %

PDL BioPharma (Nasdaq:PDLI) 16.89
Anworth Mortgage Asset Corporation (NYSE:ANH) 15.02
Annaly Capital Management (NYSE:NLY) 15.47
Frontier Communications Corporation (NYSE:FTR) 13.33
Alpine Total Dynamic Dividend (NYSE:AOD) 12.11
Apollo Investment Corporation (Nasdaq:AINV) 11.65
MFA Mortgage Investments (NYSE:MFA) 10.48

Another note has an interesting overview of the Business Development Companies.

Business development companies are similar in some respects to a REIT in that they must pass on 90% of their income to shareholders. In addition BDCs may not place more than 5% of assets in one company, can't own more than 10% of the voting stock and can't invest more than 25% of their assets in companies that are considered to be in the same industry. This provides a modicum of diversification.

Of particular interest, perhaps, Apollo Investment Corporation (AINV), which allows retail investors to invest in a quasi-private equity environment.

According to the Morningstar Equity Research Profile,

Externally managed by the private-equity firm of the same
name, Apollo is a closed-end business-development
company that invests in the debt and equity issuances of
middle-market companies. Subordinated debt, second-lien
loans, equity, and preferred stock make up 58%, 26%, 13%,
and 3%, respectively, of its investment book.

Brazil is (probably) coming down

The iShares MSCI Brazil Index ETF (EWZ) is probably coming down.

It has already fallen from its 52 week high of 80.93 (reached in January) to 68.3 (with a fall of -1.7 % just yesterday).

However, it is still probably over-valued, for several reasons:

a) the Brazilian real is over-valued.

b) Emerging Market stock indices are over-valued in general, including Brazil's (the EEM Emerging Markets index ETF is down from 46.66 to 40.65 in the same period).

c) Many commodities that Brazil exports are over-valued (including agricultural and mineral products), and will probably fall in price given China's slowdown.

d) the Brazilian economy is slowing down, posting a negative growth (or fall) of -1.0 % in industrial production in June 2010 (the third consecutive fall).

e) Lula's handpicked successor, Dilma Rousseff, is gaining in the polls, and may prove to be more populist than Lula (particularly in economic policy).

Other than shorting EWZ, another way to benefit from this fall would be to buy ProShares Ultrashort MSCI Brazil (BZQ).

UPDATE:  As of December 12, 2013, the iShares MSCI Brazil Index ETF (EWZ) has fallen to 43.8 (that is, almost half its level of January 2010).  Almost all of the factors I mentioned in this 2010 post have come to pass, except that Dilma Rousseff actually has run a tighter policy than Lula.  The HSBC Brazil Purchasing Managers’ Index (PMI) has slipped into contractionary territory. On the other hand, the Brazilian stock market seems to have been pummeled enough, and might be ready for a correction.

Doing well by doing good

These three SICAV (the European equivalent of an ETF) offer the opportunity of obtaining a fairly good performance by investing in development-oriented and socially responsible funds.

1. responsAbility Global Microfinance Fund, ISIN: LU0180190273, has managed to have a positive return in each of the past five years!

Overall it is up an annual average of 3.83 % in the past five years; not much, but much better than the markets! The fund's objective, according to its fact sheet, is "To invest its assets in securities with which financial service companies in less developed countries are financed and/or refinanced".

2. CHOIX SOLIDAIRE (C) SICAV, FR0010177899.

This one has had a less smooth ride (2008 was a bummer year), but overall it has also achieved a positive return in the past 5 years (+3.11 %).

According to Google Translate (a great tool!), "The Fund aims to beat its benchmark (75% EONIA + 25% DJ Eurostoxx) by allocating diversified equity and fixed income products selected in consideration of ethical criteria".

Does being ethical mean never having to say you are sorry?

Here is a Guide to Ethical Investing. "These charts show that you don’t necessarily have to sacrifice investment performance when investing ethically", it claims.

3. DWS Invest Africa LC, LU0329759764.

After a very bumpy start, this fund that invests primarily in Africa has had a gangbusters ride. It's "Tax Year Return" was 78.9 %!

It's investment objective is: "At least 70% of the sub-fund’s total assets (after deduction of liquid assets) are invested in shares, share certificates, participation and dividend-right certificates, and equity warrants of issuers which have their registered offices or their principal business activity in Africa or which, as holding companies, hold the majority of interests in companies registered in Africa, particularly in South-Africa, Egypt, Mauritius, Nigeria, Morocco and Kenya".

Africa may be the flavor of the month, but if you consider that it is a Region that has a huge need for capital investments, and a long way to go in developing their capital markets, there are many opportunities ripe for the picking.

In any case, I would advise you to devote at least part of your portfolio to socially and environmentally sustainable investments (also known as SRI).

Here is the definition from EUROSIF: "Socially Responsible Investment (SRI) combines investors' financial objectives with their concerns about social, environmental, ethical (SEE) and corporate governance issues. SRI is an evolving movement and even the terminology is still very much in the evolving phase. Some SRI investors refer only to the SEE risks while others refer to ESG issues (Environmental, Social, Governance). Eurosif believes both are relevant to SRI. SRI is based on a growing awareness among investors, companies and governments about the impact that these risks may have on long-term issues ranging from sustainable development to long-term corporate performance".

Considering the recent BP oil spill, and the huge liabilities faced by tobacco and chemical companies, perhaps they have a point.

Emerging Markets Index comes down, as predicted

In January, I had forecast that the EEM (iShares MSCI Emerging Markets) would "come down to at least 35 within the next 6 months".

As of this writing, it has come down to 36.9.

Feels good to be right :-)