Revisiting a Choice: Coach Bag or Coach Stock

Back in August 2008, we posed a question to our women readers. The new line of Coach bags had just come out, and we asked which would be the better buy: a Bleecker Leather Patchwork Tote, which retailed for $499, or the equivalent amount of Coach stock. The shares of Coach closed at around $29 that day, so you could have bought about 17 shares of Coach for the same price as the handbag.

We played the Devil’s advocate, or should we say Devil-Wears-Prada advocate. Let’s assume that our reader bought the new Coach bag for $499, instead of saving the money or investing it. It may have cheered her up as she carried it to the office. But the thrill of new stuff does seem to wear off fairly soon, at least for some of us, and we start taking those splurges for granted. Just another cool handbag or snazzy pair of shoes that hurt our feet.

But what if she had decided to invest the money instead, and spend $499 on Coach company stock? As the recession deepened and the market bottomed in March, she probably would have been kicking herself for not buying the bag. The stock dropped to $11.80 a share, and her $499 investment would now be worth $200. A full year later, however, in August 2009, the bag would be getting a little worn from use (that is, unless it wound up in the back of the closet). But what happened to the stock? It went back up to its original purchase price of $29, meaning she could sell the stock and buy a brand new bag. But what if she had kept the stock
and decided to let it ride. The stock, as of April 25, it was worth $43.50 a share, making her initial investment worth around $740. That’s a gain of around 50% for just having patience! And on October 28, after a sparkling first-quarter report, the stock rose to $50 a share. That means you’d have bagged $840 worth of stock.

So which would you rather own, a well worn handbag, which you might be able to sell on ebay at a fraction of its value, or more than $800 worth of stock that you can sell?

Of course, stocks are never a sure thing. And when you look at a stock, you want to be sure you’re getting a bargain, just the way you would when you’re looking for handbags. So try taking a look at Coach stock by going to the Yahoo Finance site and typing in the stock ticker symbol, which is COH or just click on this link. You’ll see all sorts of information, including what stock analysts think of the stock. Scroll down the left side of the screen and click on Analyst Opinions. Take a look at the numbers, and you’ll see a target price for the stock, which is the price that analysts think the stock will reach within a certain period of time.

And here’s where your eye for trend-spotting comes in. Are your friends buying Coach handbags? How crowded is your local Coach store? My sister tells me that women in her town are knocking each other over to get to the counter when Coach bags go on sale. It might not be too late to bag a few more shares.

So now you can see how easy it is to start stock-watching when you go shopping. And why you might enjoy looking for stock bargains for your portfolio as much as you do finding a fabulous purse that will accent an outfit.

Happy shopping! And remember, this is not a recommendation to buy or sell Coach stock, but rather a sample of trend-watching to get our fellow bargain hunters to think about investing. 

October 28, 2010 • 6:48 AM

A Case Where a Double Dip Will Not Be Refreshing

As fall football season approaches, analysts are going to be talking about defense. And stock analysts are probably going to be talking a lot about defense as well. All current indicators are pointing toward declines in the economy and in the market.

Manufacturing in the key Philadelphia region unexpectedly shrank in August for the first time in a year as orders and sales slumped, a sign that factories are being hurt by the U.S. economic slowdown. The Federal Reserve Bank of Philadelphia’s general economic Index fell to minus 7.7 this month, the lowest reading since July 2009, from 5.1 in July. (Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.)
Manufacturing, which had been the engine of recovery, is slowing after leading the economy out of the worst recession in seven decades as consumers rein in spending. With factory growth waning and companies slow to add employees, there is every indication that the economic expansion will slow in the second half of the year.

Applications for unemployment benefits in the U.S. unexpectedly increased last week to the highest level since November, showing companies are stepping up the pace of firings as the economy slows.
Jobs claims rose by 12,000 to 500,000 in the week ended Aug. 14, Labor Department figures showed. Claims exceeded all estimates of economists surveyed by Bloomberg News and compared with the median forecast of 478,000. The number of people receiving unemployment insurance fell, while those getting extended benefits increased.

A cooling economy may be discouraging employers from adding staff and prompting some to step up dismissals, raising the risk consumer spending will weaken more. The Federal Reserve said last week that the recovery would probably be “more modest” than anticipated, reflecting in part a jobless rate that’s restraining incomes.

Real estate prices, too, have continued to drop, particularly in the hardest hit regions such as California, Nevada, Florida, and Michigan.

Contrary to mainstream economists’ projections, housing has not stabilized this year. Last month alone, 325,299 properties across the U.S. received a notice of default, auction or bank repossession, according to RealtyTrac.

That’s one in 387 households. It was the 17th consecutive month notices exceeded the 300,000 mark. Although down 10 percent year-on-year, the expiration of various governmental stimulus measures saw July’s number jump 4 percent from the previous month. Lenders seized 92,858 properties in July, which is the second-highest monthly tally since RealtyTrac began keeping records in January 2005.

As for consumer sentiment, that, too, is in the dismal rate. “Nearly two-thirds of Americans believe the economy has yet to hit bottom, a sharply higher percentage than the 53% who felt that way in January,” according to a recent poll by the Wall Street Journal.

It’s not surprising that a growing and vocal minority of economists believes that there will be a double dip recession, primarily because of the unrelentingly high unemployment and the rapidly faltering housing market.

The notion of a “jobless recovery” has been around since the recessions of the 1950s and 1960s. It is a concept built on a relatively simple idea: employment lags during a recession but it is always part of a recovery cycle. Production rises as businesses see the end of a downturn and anticipate improving sales. They are reluctant to hire new workers until the recovery is confirmed, but once it has been, hiring picks up.

The 2008 – 2009 recession was – if it is actually over – different from previous recessions because of its depth and causes. The first trigger was the drop in housing prices, which robbed many people of their primary access to capital. As that access disappeared, so did the availability of credit. Consumers, usually the mainstay of the economy, saw their buying power evaporate, while businesses cut inventory and production. Joblessness rose. Finally, consumer confidence plunged.
The unemployment rolls are now more than 8 million, and perhaps more seriously, over 1.4 million people have been out of work for over 99 weeks – which means they are no longer eligible to receive unemployment insurance benefits. This segment of the population has already begun to add to the number of indigent Americans and will continue to do so unless they can find homes with friends and family.

If there is a second dip to the recession that supposedly ended in 2009, according to economists and the federal government, it is likely to begin within the next two quarters. Unfortunately, technical indicators are backing the notion of a big drop in the market as well.

August 19, 2010 • 3:39 PM

Hot Weather, Hot Commodities

Those of us who live in “hot” states like Texas that are also vulnerable to hurricanes are thinking about how commodities are going to be affected by the weather. Experts have predicted an unusually stormy hurricane season, and already, this summer has been the hottest in three years.

We’ve seen heat records set even in states like New York that usually avoid extreme heat, and that has meant that many analysts are forecasting the biggest gains in natural gas futures since 2005 for the six months ending in September.

Hot temperatures increase gas demand as mostly gas-fired power plants are called on to meet spikes in power demand caused by air conditioning usage. Prolonged hot spells can make a dent in gas storage levels, which have been strong amid increased production from shale gas formations.

According to the median forecasts of analysts in a survey by Bloomberg, natural gas may rise 27 percent from the first quarter to US$4.90 per million British thermal units, which would extend a 19 percent gain in the three months through June 30. The estimates actually ranged from $4 to $5.50.

America’s fourth-hottest June on record and temperatures at a record 103 degrees Fahrenheit (39 degrees Celsius) in New York have cut inventory gains, just as meteorologist forecasts for the highest number of named Atlantic storms in five years raise concerns about supply disruptions in the Gulf of Mexico. Gas in the Gulf of Mexico represents about 10 percent of U.S. production.

According to the U.S. Energy Department, supplies of natural gas dropped below year-earlier levels last month for the first time since April. The stockpile surplus compared with the five-year average dropped to 12 percent in the week ended June 25 from 19 percent at the end of April, according to the Energy Department.

Analysts are speculating that more gas will be burned in order to keep people cool during this hot summer, and that the year-over-year storage deficit will persist. There will be 861 cooling degree days in the quarter, the highest level since 885 in 2007, according to meteorologists. The year-over-year storage deficit will likely continue to grow in the next few weeks, given the weather forecasts calling for higher cumulative cooling degree days.

As of early July, gas gained 34 percent from a year ago, compared with a 15 percent rise for crude oil.

Looking back to 2005, prices almost doubled in the second and third quarters of 2005 after hurricanes Katrina and Rita destroyed 113 platforms in the Gulf of Mexico and damaged 457 gas and oil pipelines. Gas rallied 82 percent in the six-month period and reached a record $15.78 that December.

One possible limit to price rise would be increased exploration and production. There were 960 active gas-drilling rigs in the week ended July 2, up 40 percent from a year earlier, according to Baker Hughes Inc., a Houston-based provider of services to the oil and gas industry. Horizontal rigs, which are mostly used in drilling for shale gas, increased to a record 849.

However, Hurricane Alex, the earliest Atlantic hurricane since 1995, cut off about 919 million cubic feet of daily production in the Gulf of Mexico last month, about 15 percent of regional output, before it came ashore in Mexico.

Prices rose 6.3 percent last month as a glut was eroded by above-normal temperatures and a strengthening U.S. economy. Industrial demand, which accounts for 28 percent of the nation’s gas consumption, will increase 6.1 percent this year, the Energy Department in Washington estimated on June 8. They rose around 7% in just one day this past week.

We’re looking at two simple ways to invest in potential higher natural gas prices. Investors have begun to move into the United States Natural Gas Fund (UNG), an exchange-traded fund (ETF) that invests in natural gas futures. But ETFs that invest in energy futures can take a bad turn as a market condition known as contango eats away their returns.

A safer strategy is investing in a diversified ETF that holds shares in commodity producers. For natural gas the relevant fund is the First Trust ISE/Revere Natural Gas Index Fund (FCG).

This fund has stakes in major natural gas names like Devon Energy (DVN), Quicksilver Resources (KWK), and Newfield Exploration (NFX). It carries a .60% expense ratio, and isn’t affected by problems in the futures market. 

July 17, 2010 • 9:51 AM

Looking to the Far East for Direction

The stock market has been bouncing up and down like an overinflated soccer ball, although mostly down lately, on news coming from all directions. But perhaps the strongest push in market direction has come from China, which has announced measures that will affect China’s place in the world’s markets.

U.S. stocks bounced upward briefly on China’s announcement on June 19 that it was scrapping the yuan’s two-year-old peg to the dollar. Ending the fixed 6.83 yuan peg to the dollar should help “contain inflation and asset bubbles,” China’s central bank said in an official statement. The move may have been influenced, however, by potential criticism from U.S. President Barack Obama and other world leaders ahead of the G-20 talks.

A strengthening of the yuan against the dollar would help spur the global economic recovery, reduce imbalances and support prices of commodities and emerging-market assets, according to some Western analysts, who have welcomed this move. An analyst at Credit Suisse AG, for example, said the currency is almost 50 percent undervalued and could appreciate more in the next 12 months than forwards contracts suggest.

Obama told Chinese leader Hu Jintao that the U.S. welcomed China’s move to allow greater flexibility of its currency and seeks a greater balance on trade. Obama told Hu the decision was an important step in rebalancing the global economy and that “implementation of it will be very important,” Jeff Bader, director of Asian affairs on Obama’s National Security Council, said in a briefing after a meeting of the two leaders.

The reality, however, as some have observed, is that for China, the world’s largest exporter, the aim of allowing the yuan to rise is primarily aiming to raise consumption and reduce reliance on exports. Measures will include a structural tax cut of about 500 billion yuan (US$73.6 billion) this year and more subsidies to low-income families.

“Our major task is to adjust the economic structure, and the exchange rate regime reform is in line with this strategic goal,” said Ma Xin, a director at the National Development and Reform Commission. The exchange rate reform was, and should be, determined by China’s economic fundamentals, not foreign pressure, Ma said.

China’s decision will also help it control inflation and avoid asset price bubbles, said Zhang Tao, head of the international department at China’s central bank.

The notion that China’s primary motivation is in improving domestic conditions was reinforced by the announcement on June 30 that at least nine Chinese provinces and cities will raise minimum wages by as much as a third, after Premier Wen Jiabao called for measures to head off growing worker unrest in the world’s third-largest economy.

Many economists lauded the move. “This is a step in the right direction,” said Stephen Roach, Morgan Stanley’s Asia chairman, in Beijing. “China has a very low personal income share of GDP, and wages, surprisingly low wages, and limited employment growth are part of the problem.”

For investors outside China, the prospect is inviting as well as confusing. China, which has the worst-performing stock market this year after Greece, looks like a buy by almost any measure, according to top-ranked China analysts. The largest owners of yuan-denominated stocks have turned net buyers for the first time since equities bottomed in 2008, while some international investors are betting on a rally in funds that hold China’s yuan-denominated or A shares.

However, in our opinion, the stocks most likely to benefit from any rise in the yuan would be those of companies that are most likely to increase sales to China, particularly to its local consumers who may eventually gain more buying power. Taiwan, for example, is looking forward to greater travel there by mainland Chinese. Countries like Malaysia and Indonesia have also declared a potential benefit to their economies from the rising yuan.

As for U.S. companies that will benefit, one that we are looking at is fast food giant Yum Brands (NYSE:YUM), which incudes Pizza Hut and KFC, and which has been able to adapt better than most Western companies to Chinese tastes. Pizza Hut in China, for example, offers eel on its pizzas. If the global economy continues to grow rather than contract, then it will be time to look at commodities and at U.S./global companies like Caterpillar (NYSE:CAT). 

July 2, 2010 • 9:00 AM

All that Glitters…

Many financial advisors feel that investors should have a minimum of five percent of gold in their portfolios, regardless of the state of the economy. The recent extreme volatility in world markets has made gold even more attractive in uncertain times. But there are many options for purchasing or holding gold, and investors can sometimes get confused or overwhelmed by the choices. And what’s more, as a commodity, gold itself can be highly volatile.

The most obvious way to purchase gold is to buy and store the physical metal itself in the form of coins, bars or perhaps jewelry. From an investment-worth point of view, this is the “purest” way to play the metal as a commodity. When gold commodities and futures go up, the market worth of your gold bullion goes up. This is also the most tangible option, and it gives some investors the strongest feeling of security. Even if banks collapse, you’ll have some gold coins at home or in a safety deposit box. The downside, however, includes possible theft and the lack of instant liquidity. You have to find a way to store it safely, and if you need money in a hurry, it might take some time to sell your gold.

There are other ways, however, to invest in physical gold without having to store it yourself. You can buy bullion through a dealer in “pooled” accounts, which means that you own your exact allotted amount, but the gold itself will be “fungible” – that is, there is no specific stash of gold with your name on it. Rather, an audited amount of gold is being held in the dealer’s storage facilities, and the gold you own is actually a promise to pay you back that amount once you decide to sell it. Investors can also buy gold through a dealer like GoldMoney, which is essentially a gold bank, where you will actually have gold stored with “your name” on it. Their vaults are audited regularly, and if you buy an amount of gold, they physically add that amount to their vaults for you. The downside is that there is a monthly fee for holding your gold, which gets deducted from your total gold balance.

Many investors have found that the easiest way to invest in physical gold is through an exchange-traded fund like the SPDR Gold Trust (NYSE:GLD), which issues shares based on the actual physical gold it holds. The shares represent units of fractional undivided beneficial interest in and ownership of the trust, whose investment objective is for the shares to reflect the performance of the price of gold bullion.

Another way to invest in gold, which may bring greater risk as well as greater reward, is to buy shares in individual gold mining companies or in an exchange-traded fund based on an index of mining companies. Gold-mining equities don’t necessarily move in lockstep with the commodity.  For various market-related reasons, the stock of Barrick Gold Corp. (NYSE:ABX) or Agnico-Eagle Mines (NYSE:AEM) might be over or under-valued in relation to the metal itself. This can be disappointing when the price of bullion is rising, but it can also counteract the effects of weaker gold prices. During the Great Depression in the U.S., gold stocks soared, even when physical gold became illegal to own privately. In addition, many gold producers, such as BHP Billiton (NYSE:BHP), also produce other precious and common metals, and this can provide more cushion to the stock and hedge against gold prices. It also means, however, that the stock is open to risks from price volatility in those metals.

You can mitigate the risk of owning individual mining stocks with Market Vectors Gold Miners (NYSE:GDX), the ETF that tracks the NYSE Arca Gold Miners Index. The Index provides exposure to publicly traded companies worldwide involved in the mining for gold, representing a blend of small, mid and large capitalization stocks. There are also companies like Royal Gold (NASDAQ:RGLD) that don’t conduct mining operations, but which acquire and manage royalties from gold-producing properties.

It’s important to note that over the past year, GLD has outperformed the mining index. However, some individual mining companies have surpassed both. So diversification would seem to be the best way to go with gold.

June 17, 2010 • 7:16 AM

Staying Calm When the Market Pushes the Panic Button

One of our favorite ways to judge current sentiment in the market is an index that tracks the Chicago Board Options Exchange. It’s known as the Volatility Index, with the U.S. ticker symbol VIX. The Volatility Index is constructed using a wide range of options, including puts and calls, on the S&P 500 index, and it indicates what the market is expecting in the way of 30-day volatility.

The VIX is also known as the “fear gauge,” although we prefer to think of it as the pulse of the market. It races when investors get scared and slows down at calmer times. Options get more expensive when investors become fearful about the market, and they get cheaper when investors become more optimistic. People buy options to reduce risk, and that’s the basis of the way the VIX trades. It’s similar to insurance rates, which go up when the insurance company thinks there is a bigger risk.

For example, if stock in company ABC is at $10 a share, and investors don’t think that ABC stock will have much volatility in the near future, any given (hypothetical) ABC option could be trading at $2. But if there is important news that could affect company ABC, such as possibly being taken over by another company or having a major drug approval by the FDA pending, the same exact option could be trading at $4 instead of $2, as the implied volatility goes up.

You can actually invest in the VIX by purchasing shares in an ETN (exchange-traded note) called the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX). The investment seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve. (The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.) When you buy shares of VXX, you’re expecting the market to increase its volatility, and you can actually benefit on days when your other holdings might be declining.

On May 6, the VIX lived up to its nickname as the fear gauge, when the U.S. market had its biggest intraday drop since 1987.  Fears about the spread of Greece’s debt problems led to escalating losses in all the U.S. stock indexes, which accelerated as the day went on, aided by automatic electronic trading. The VIX climbed more than 60% just before the stock indexes plunged briefly as much as 9% before climbing back to losses under 4%. Shares of VXX didn’t climb as much, but they did gain more than 30% at one point before retreating.

For those whose portfolios showed wild declines during that afternoon, owning shares of VXX was a certain consolation. At least something in the portfolio was going up as fast as other shares were going down.

Volatility can work both ways, of course, and just days after the market’s intraday plunge, the benchmark indexes for U.S. and European stock options both headed for record drops after Europe’s leaders unveiled an almost $1 trillion loan plan to end the region’s sovereign-debt crisis, and global stocks soared. The cost of options dropped as optimism rose, and the VIX fell 32 percent to 27.67 as of 10:16 a.m. in New York, retreating sharply after its record weekly gain the previous week. And so those who had been happy the previous week with their VXX shares watched them go down, but they had the consolation of the rest of their portfolio going up.

It wouldn’t hurt to own some shares of VXX during volatile times, but we find the VIX most useful as a gauge of market sentiment in the near future rather than as a way to take out insurance for our portfolios.

May 13, 2010 • 2:06 PM

Some Important Lessons from the May 6 Panic

We learn lots of safety techniques to minimize our losses in the market, and when the market is going up, they don’t seem that necessary. But the Panic of May 6 was a big lesson in what to do and what not to do to protect your holdings.

The first rule that was violated was to avoid acting out of panic. Lots of folks followed the herd off the cliff today. The market started sliding, and investors who had placed automatic stop losses on their holdings were in jeopardy of losing their stocks at a very cheap price. There are always sharks out there just waiting for those dropping stocks, and they were scooping them up right and left. The way to prevent huge losses is to have not only a stop loss but a stop limit, which means you’re only willing to sell within a certain price range.

We were watching several indexes closely, and we noticed that some ETFs based on those indexes were sold off at ridiculously low prices. Even savvy traders were stung as indexes fell below certain support levels, triggering yet another wave of sell-offs.

We hope you just held on to your liferaft as it hit some heavy waves, knowing it was going to get you through to calmer waters.

May 6, 2010 • 1:11 PM

Getting a Boost to your Bottom Line from a Mouse or an Alien

Is it time to add a mouse, an ugly green giant, some blue aliens, or some comic-book heroes to your portfolio? I’ve always enjoyed the entertainment sector of stocks, and it can be much more fun comparing the pros and cons of Disney versus Dreamworks or Nintendo’s wii versus Sony’s PlayStation than trying to figure out the relative merits of various analog chip makers.

Will Mickey outlast Shrek, now that Disney owns Pixar? Will Avatar beat out Ironman 2 in DVD format? Or in video games?

Over the years, I’ve held stock in a number of entertainment companies that have turned out to be good long-term buys. I held on to them during the recent downturn not only because entertainment stocks fared well during the Great Depression when people needed diversion from their troubles, but also because entertainment has grown global, and certain brands have become household names all around the world. Those are the kinds of stocks I want to keep.

The biggest and most obvious brand name in entertainment, of course, is Disney (DIS). My husband and I were fortunate enough to inherit some Disney shares that had been purchased by his grandmother decades ago. It was my first lesson in the value of stock in a company that people love and have related to for generation after generation.

Dreamworks (DWA) has done its best to become the new Disney, though it remains to be seen if its icons like Shrek become as long lasting in their impact as Disney’s Cinderella, Sleeping Beauty, and more recently, Nemo and Wall-E. By bringing Pixar inside its Magic Kingdom, Disney has maintained its hold on the public’s imagination.

Another possible contender in the world of the imagination is Hasbro (HAS), which spans the world of comic books, movies and toys. Hasbro is harnessing the power of other brands like Marvell with its action figures that are spun off from popular movies like Ironman and Spiderman. Just as important, Hasbro also owns its own long-time classic games like Monopoly, which director Ridley Scott, of Gladiator fame, is now making into a movie.

However, it’s important to note that the stocks in the entertainment sector that have become the best performers have more to do with technology and means of delivery than with actual content. During the downturn, American consumers began to turn to Netflix (NFLX) to deliver their movies to their mailboxes in the form of DVDs. The stock of Netflix has taken off like a rocket. Shares have more than doubled in the last year, going from $45 last May to more than $100 currently.

Another gainer is Coinstar, operator of the Redbox $1-a-day movie-rental dispensers, which recently rose the most in more than a decade after raising its 2010 outlook and reporting quarterly profit that beat analysts’ estimates.

The steadiest performer in the sector over the past couple of years and probably for the near future is a company that pleases the ears rather than the eyes: Dolby Labs (DLB). This company’s cutting-edge technology is a major driver of the audio electronics and entertainment industry. Serious consumers recognize this brand when they see it in conjunction with home entertainment components as well as movie theaters and films. The Dolby label is synonymous with top-end, premium quality and performance. In fact, it’s not only the industry standard. It’s the gold standard. Everyone wants Dolby sound. The company’s most recent report reinforced the evidence of its growing global market.

The fastest growing stock in this sector over the past year, however, is highly visual. It’s so visual that some viewers may get a little queasy at times. Imax Corp (IMAX) has been blossoming along with the popularity of 3D movies. The company has benefited from the growing appetite for such blockbusters as “Avatar” and “Alice in Wonderland.” The price of the stock has tripled over the last year, from $6.48 to currently around $20. In its recent report, its profit was $.53 a share, which beat analysts’ estimates of $.37 a share. Revenue more than doubled, as more theaters showed popular Imax films. The company has also been busy signing deals with movie studios and theaters. It’s an accomplishment that even Ironman might envy.

April 30, 2010 • 10:20 AM

Making the Best of Bad News

There are times when bad news can cause stocks to plummet. But bad news for some stocks may be good news for others. One of our most reliable methods for finding bargain stocks is to assess bad news and try to predict how that news will affect certain companies. We’ve learned over the years that bad news is actually a more reliable indicator than good news in finding stocks with the most upside.

For example, when it became apparent that the swine flu, known as H1N1, was about to become an epidemic, we began to look around for companies that would be affected. We made a list of “flu” stocks that I thought would probably increase in price as a result of the attempts to fight the epidemic. That list included companies that were making preventative vaccines as well as medications like Tamiflu for treatment. It also included companies that made protective masks and flu tests.

A few months into the epidemic, our “flu” stocks were very healthy, including a Chinese vaccine maker named Sinovac (SVA) that increased as much as 850 percent. A small company called Alpha Protec (APT), which makes protective masks, gained 500%.

Similarly, when it became clear that the credit crisis in the U.S. was leading into a recession, we made a list of companies that would probably benefit from the downturn, including discount stores, pawn shops (EZPW), and makers of inexpensive cosmetics like Revlon (REV). We also thought that education would fare well, as those who lost jobs would go back to school to get new training, so we added a private education provider called Apollo Group (APOL).

Our list of downturn stocks on the whole did well, with Revlon as the best performer, going from a low of $3.11 to a high of nearly $20 during 2009.

Bad weather can also be a good stock indicator. Late last summer, when weather forecasters were calling for a snowier winter than usual, the stock that came to mind was Compass Minerals (CMP), which is the leading supplier of salt for the de-icing of roads. The forecasters were correct, and records for snow this past winter were set around the country. The stock has climbed from $50 a share to nearly $80 a share.

A more recent example of the good new/bad news effect is a company named Golfsmith International Holdings, Inc. (GOLF), a specialty retailer of golf equipment, apparel, footwear and accessories. The company’s stock was at a low back in December 2009 when the sport of golf, already suffering from the economic downturn, suffered another setback when Tiger Woods took an indefinite leave of absence from the game after revelations of hanky panky outside the fairways. The sport was hurt severely by the tarnishing of its best player’s reputation.

However, the pendulum always swings, and when Woods returned to participate in a highly competitive and compelling Masters Tournament, won by the crowd favorite, Golfsmith’s stock quickly rose to a high of $5.14 the day after the tournament, making it almost a double in just a few months.

However, a stock obviously needs more than events and headlines to make it a good buy. Golfsmith’s stock has declined since its peak, in part because the numbers in its last report simply weren’t good enough to sustain a high price. It’s important to distinguish between a stock that is a true bargain and one that will inflate on headlines and pop once the numbers come in.

April 23, 2010 • 8:32 AM

Happy Earth Day!

April 22, 2010 • 1:46 PM