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This Investment Is Off Target


Skepticism is justified given the recent run-up in shares of Target (TGT). Shares are up more than 30% over the past year, beating both the market and direct competitors such as Wal-Mart (WMT) by a fat margin.

However, a deeper dive into Target’s business shows reason to question the rise. While Target has a fine brand, a long history of growing its dividend, and runs a well-liked chain of stores, its stock price appears to have gotten well ahead of its fundamentals. Several glaring negative points dampen the company’s outlook.

First and foremost is the embarrassing fiasco that was the Canadian expansion. Target bought out Zellers, a chain of 124 existing stores largely in mediocre locations. Target rebranded the stores and analysts hoped that Target would be able to – at last – spread its powerful American brand abroad.

Instead, it ended as a $7 billion failure. Target Canada filed for creditors’ court protection – the equivalent in Canada of Chapter 11 bankruptcy and closed all its Canadian stores. Just 26 months after it arrived, Target came limping back to the states with its tail between its legs and $7 billion poorer.

To put that in perspective, Target’s whole market cap is just $50 billion. As such, the company piddled away 15 percent of its entire valuation in a disastrously-managed international expansion. Stated another way, the company wasted 4 years worth of its annual dividend payments on its Canada misstep. For yield-seeking investors who own the stock largely because it’s a Dividend Aristocrat that pays a reliable dividend, that’s a sorry waste of funds that could have gone to shareholders.

Moreover, it serves as a reminder of the low ceiling on Target’s business. If they can’t cut it in Canada, they certainly aren’t going to have success in more volatile emerging markets. While Wal-Mart is out trying to conquer the globe – stores in 27 countries and counting – Target is stuck being a #2 player in its domestic market with no prospects for international expansion.

Furthermore, Target is still weighed down by the disastrous hacking scandal from 2013. In the weeks following Thanksgiving of 2013, hackers broke into Target’s database and took information on 110 million(!) Target customers. That’s more than 1 out of every 3 Americans. The hackers got access to names, addresses, phone numbers, and e-mail addresses.

Target’s same-store sales dropped significantly following the scandal, and for obvious reasons, customers continue to be wary of shopping through Target’s online website. As of December 2014, only 37% of Americans had visited Target’s website or a physical store in the preceding month, down sharply from 53% in 2007.

Over the past decade, the company’s net income margin has fallen by more than half, dropping from 4.5% to 2%. That means the company is only earning a net profit of 2 cents on every dollar of product it sells, whereas it used to pocket almost a nickel. Similarly, the company’s earnings, which topped out at more than $3 billion in the early 2000s has fallen to just half that today.

Shares topped out in 2007 at $70 each before dropping during the Great Recession. Until late 2014, shares lingered well below that figure – as you’d expect with its profit margin and earnings falling.

However, optimism on the new CEO, the closure of the failed Canadian experiment, and investors’ general desire to chase higher-yielding stocks irrespective of underlying fundamentals has bolstered Target shares recently. Now they sit near their all-time high despite an eroding, or at best flat, business. I’d say it’s a pretty easy choice: Sell here and roll the profits into Wal-Mart or another such retailer whose shares have already sharply fallen from its 52-week highs.

I’d be remiss not to mention the positives, as it isn’t all bad news for Target. First up is the new “City Target” initiative. It’s getting positive feedback – particularly for the inaugural Boston location – and it may give Target a big leg-up against its biggest competitor. Wal-Mart has largely been locked out of the urban market, both due to size constraints and due to political opposition to its brand.

Target’s only serious domestic competitor, Wal-Mart, is thought to be an inferior store by most customers. Target is able to charge significantly higher prices for many of its products than Wal-Mart without hurting sales. In particular, the store is viewed as having better clothing and a much stronger pharmacy.

Still, that’s not enough to justify Target trading to all-time highs with its underlying business so weak. With its brand damaged from the enormous hacking scandal and the possibility of international growth now on ice, there’s simply not enough reasons to stay long Target. This $79 level is a good place to take profit.

Kinder Morgan: Is It Finally Time To Buy?


Kinder Morgan (KMI) is a very attractive stock on at least one basis. The company currently pays $1.96/share per year in dividends, working out to a 6% dividend yield. In a world of zero interest rates, that’s a rather generous payment.

What’s better, the company has promised to grow the dividend at a 10% annual rate out through 2020, which would take the dividend to $3.16/share over the next five years. Based on the current $34/share price, that’s a yield of more than 9%. Juicy.

Since May though, it hasn’t been all roses for Kinder Morgan’s shares. They’ve fallen from $44 to $34 during that time. Clearly the market is showing some skepticism toward the company’s outlook.

Some of that decline can be attributed to general weakness in the energy sector. Oil prices are falling again, hitting new post-2009 lows, and it’s clearly weighing on sentiment.

But some of the decline is specific to Kinder Morgan. Previously, its shares had held up despite energy’s struggles last winter. Kinder Morgan likes to remind investors that it is not particularly exposed to energy prices. Its business is largely driven by volume; they get paid for product passing through their pipelines regardless of the end value of the oil or natural gas using their system.

The company estimates it loses $10 million in distributable cash flow per $1 fall in the price of oil. Based on the $50/barrel or so drop from last year’s pricing, that’s $500 million slashed off Kinder Morgan’s cash flow that they can pay to shareholders. Given that the company pays about $4 billion a year in dividends, $500 million is a sizable hit to the company if oil prices stay this low, but it isn’t a knockout blow by any means.

So energy prices aren’t enough to take down the Kinder Morgan structure. The bigger concern at this point is financial leverage. Kinder Morgan is running around 7 times net debt to annualized EBITDA, based on results for the first half of the year. That’s rather aggressive. Looking at other energy firms that trade at this strained debt/earnings level, one wonders if Kinder Morgan will be able to maintain its investment grade debt rating. The company’s debt is currently at BBB-, just one notch away from being lowered into junk territory.

This is a pivotal challenge for Kinder Morgan. The company has $21 billion in construction backlog. Backlog are projects that it intends to buildout to generate future earnings growth and support the promised dividend increases. However, the company needs access to further cash to be able to build out its backlog. $21 billion is no small sum.

The company can, and periodically does, raise more money selling stock. However, it would be hard to get anywhere close to the required $21 billion from the equity market without severely impacting the company’s share price. Thus, the better solution for the company is to take out more debt to build new projects. This would become much more difficult and expensive if the company could not maintain its investment grade credit rating.

Keep in mind with oil prices where they are now, the company generate very little free cash flow beyond merely what is necessary to pay the dividend.

By no means is the picture all bad, however. Richard Kinder has established a tremendous industry track record, and he continues buying more shares in the company. Insider buying is always a good sign, particularly in a battleground stock.

And while the company is financially strained with lots of debt, its core operations remain firmly profitable and largely untouched by the ongoing energy bust. The company has many one-of-a-kind assets and is a key piece of the overall American energy infrastructure. That is to say, the company isn’t going anywhere despite the near-term problems in the industry.

So is the stock a buy today? It’s certainly a better deal now at $34 than it was at $44 not all that long ago. It’s still a risky play here though. Until we see how the energy sector bust plays out, it is hard to call a bottom on shares.

If prices stay low, Kinder Morgan will likely struggle to fund its backlog, maintain existing operations, keep growing the dividend as planned, and hold on to its coveted investment-grade rated debt. Any uptick in the energy sector could resolve this issue quickly, however.

While the 6% current yield and 9% promised future yield are enticing, I’d hold off until shares fall a little more and/or oil prices turn upward. There’s no rush to buy the stock with the prospects for the next few quarters still so murky.

Who Or What Is Google Alphabet Inc.?


August 10th saw Google make the big announcement that they are changing their parent company name to Alphabet Inc. Considering that Google has become much more than a search engine over the last few years, it seems appropriate that the parent company should change it’s name to encompass all of their ventures.

At the same time, the change in identity has also brought in a new corporate structure. The two Google founders – Larry Page and Sergey Brin – will become Alphabet’s chief executive and president. What this will mean in terms of the overall performance of the company remains to be seen.

In the past, predicting how Google would perform on the market was quite difficult. This was mainly because of how secretive they could be about their general performance. For example, it is still unclear as to whether YouTube has been profitable for Google or if it is actually running at a loss. The change to Alphabet could lead to things becoming a little clearer.

For the moment at least, it looks like people who have put money into Google will be enjoying a few benefits. It’s though that YouTube could have created $5 billion of revenue last year and the search advertising aspect of the business is running at around 60% profit. In 2014, Google had $66 billion in overall revenue. That will mean a great deal to potential investors.

Of course there are always some risks. In the long run, Alphabet could run into a few problems. One of the first thing Alphabet will have to deal with is European regulators. They have been charged with placing their own companies higher in search engine results even when other companies have paid to have their company ranked higher. They will have until August 17th to respond to the charge, which could well have a damaging effect on their stock.

The other problem Alphabet will have is the Google advertisements. When companies were paying for advertisements on desktop computers, they were proving to be quite lucrative. On mobile devices however, they do not make even close to the same amount of money. Considering that 89% of the $66 billion revenue in 2014 came from this aspect of the business, there could be a little trouble in the future. Google will have to find a way to make their paid-advertisements business more suitable for mobile devices if they are to keep these levels of revenue in 2015.

For now at least, investors in Google will be very happy indeed. It is the future that could pose a few problems. Alphabet will probably face a lot of pressure to streamline even further than they already have, which could prove to be very difficult. If they want to continue the solid streams of revenue they have been enjoying, changing to Alphabet will have to be just the first step in their attempts to streamline.

INCO 10% Average Return For The Next 10 Years (India Consumer ETF)


The burgeoning middle class in India will drive global investments for the next 10 to 20 years and experts in emerging markets believe INCO is a solid pick to take advantage of this massive growth. An investor would be wise to divert a part of their portfolio to INCO over the next decade. The middle class in India stands around 50 million people, or 5% of the population and by 2022, India’s population will draw even with that of China, at 1.4 billion people, and then exceed it (by 2030 India is expected to be home to 1.5 billion people).

INCO seeks investment results that correspond to the price and yield performance of the Indxx India Consumer Index

  • Net Expense Ratio: 89%
  • 34.68 as of close of the markets on 8/12/15
  • Top holdings include Godrej Consumer Products Ltd (5.7%) – Bajaj Auto Ltd (5.4%) – Motherson Sumi Systems Ltd (5.4%)
  • 52 week range: 28.26-37.75

Time To Stock Up On Commodities As Trading Hits 13 Year Low?


Even though many people have been talking about the losses on the Greek and Chinese stock markets, the real losses have been coming from somewhere else. The commodities market has suffered the most over the last year or so. Oil prices have dropped by 10 percent while coffee prices have also dropped by a staggering 30 percent. Even though the Greek market has only dropped 5 percent up until now, they still seem to be getting more attention than the commodities complex.

But why have commodities fallen to their lowest trading value in 13 years? Here are some of the reasons why shares in commodities are being sold so cheaply.

Global Growth Slowing Down

When the economic activity of a country – or indeed the world – starts to deteriorate, commodities are one of the notable industries that tend to follow suit. Commodities such as energy and metals used in industrial work tend to take the biggest hits. This is because when there is limited growth, the demand for these particular products goes down.

Fed Hike Expected Imminently

With fall fast approaching, many people are expecting the Federal Reserve to announce a hike. While growth has been below expectations, the drop has not been sharp enough to stop this from happening. When the expected hike does take place, it will raise the dollar up even higher that its current 8 percent rise this year. This will happen because other central banks are easing rather than hiking. When this happens, real estate also rises. This will have a direct impact on commodities, especially on things like precious metals.

Excessive Supplies

This has been one of the biggest factors that have been affecting areas like energy prices. More specifically, crude oil has been taking the biggest hit due to excess supply. The supply of crude oil from the Middle East has been increasing, to such an extent that the US alone saw an increase of 500k barrels of crude oil since the start of 2015. This problem does not look like it will slow down anytime soon either. A deal with Iran is in the works and countries like Saudi Arabia and Iraq are increasing their supplies as well.

Adding It All Up

When you put all of these factors together, it becomes clear that commodities are going to be under some pressure for the foreseeable future. For that reason, investors are not investing in specific commodities. Instead, they are focusing on the companies that produce said commodities. And if you’re looking for cheaper stocks, then now could be the best time to be buying. The US energy industry is currently selling stocks at a 40 percent discount. Stocks in the metal industry are said to be even lower than that. On the commodities market at least, there are plenty of bargains to choose from.

Should Investors Be Buying Commodities?

For now, it’s best to wait. Because the prices of commodities are falling and the economy is slowing down, it’s best to wait and see how things pan out over the coming months.