Monday, December 26, 2005

Investing in 2006

As 2005 is winding down, the questions in many investors minds is what are the places to invest in 2006? There are some publications that have dedicates some space to this question, including the recent business week article. In this segment, I will go through some predictions made about 2006 by some analysts.

I drove around my neighborhood this X'mas and found better lights and decoration compared to the past five years. Utility bills this winter are already significantly higher compared to the same period last year and this doesnt seem to have fazed our neighbors. Is it the home equity loans or is it better financial situation of households that is the reason for increased confidence? My bet is on the latter.

Almost all the economists expect a slow down in the U.S in 2006 especially in the second half. The reason for the slow down - the overextended U.S consumer. I dont see this to be an issue. Several of my friends are thinking of buying new cars in 2006, many are upgrades from one car per family to two cars per family. I went to a Honda car dealership myself and found the salesman charging two thousand dollars above MSRP for one of the models. The salesman was so confident he was telling me there are too many money'd people who are willing to pay a premium for the model.

Slow down in 2006 seems highly unlikely, it is more likely we will have increasing GDP for the next three years. The business cycle has hit an upturn and it will be a while before we hit a downturn.

Given this, what are the good stocks to buy? I like BRKA/BRKB as it is still trading very close to its liquidation value. The downside risk is minimal for this company. The earnings growth is comparable to the tech giant Microsoft and the investments are in the hands of some of the best people in the world. Compare this to Google - which has a liquidation value of about eight billion while the market cap is close to one hundred and thirty billion. There is also SEB which has a PE of eight and has seen an appreciation of about 50% this year. It still has a low market cap of about 2 billion. There is also PACCAR (PCAR) which is recommended by the Fools. ( ). PACCAR has a market cap of 12 billion dollar and a PE of about twelve. PCAR builds big trucks and has market presence all over the world. They have also increased their dividends consistently for the past forty years.

In the tech sector, one can speculate with Google, Yahoo!, Microsoft. There is also other e-commerce plays EBay and Amazon. None of these stocks are cheap with the probable exception of Microsoft. Here is a brief overview of the market cap, revenue growth and P/E of these companies.

Company Revenue Growth Market Cap P/E

Google 70% 130 billion 95
Yahoo! 30% 58 billion 38
Microsoft 7-10% 283 billion 22.5
EBay 10-15% 62 billion 62
Amazon 30% 20 billion 42

Of the lot, EBay looks the priciest for its growth followed by Google, Amazon and Yahoo!. Amazon's balance sheet doesnt look pretty with cash, cash equivalents and marketable securities declining year over year. The overall balance sheet looks better than last year and the growth is still good. Google's growth rate is going to decline slightly next year - as noted in an earlier blog, next year's growth is already priced into the stock. Microsoft's earnings are going to increase thanks largely to cost cutting. The revenues are expected to grow faster in FY2007 as more products are released. Yahoo! is also seeing slower growth and next year's growth is already priced into the stock. These stocks are mainly priced for their growth year over year rather than their balance sheets and growth seems to be slowing for almost all the companies with the exception of Microsoft.

One can go for individual stocks or one can also go for specific sectors like utilities, materials energy, emerging markets, foreign market indices etc. There are numerous ETFs that allow the investor to invest in any market of their choice at a reasonable cost. Two sites and provide good information on ETFs. There are also mutual funds from vanguard and fidelity that provide low cost alternatives to ETFs. The mutual funds are better than ETFs for investors that like to do periodic contributions. The trading cost must be balanced with the fund expenses. As an example, Vanguard charges a ten dollar fee to maintain an account that has less than ten thousand dollars worth of assets. More on ETFs and mutual funds in the next blog.

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