Newsletter December 14, 2003

InvestorsFriend.com Newsletter Dec 14, 2003

Saddam Hussein

I would think that Saddam’s capture will breath some more life into the market tomorrow (Monday Dec. 15). In the long-run though I don’t think it will have much impact. The U.S. market is not suffering from any kind of a “terrorist discount” and therefore a lowering of the terrorist threat cannot really help it. I’m sure that there are some¬† international markets that do suffer from “terrorism discounts”. That is not my area of knowledge but I suspect a bit of digging would uncover the appropriate markets.

Canadian Dollar

A lot of commentators used to decry the low Canadian dollar claiming that every drop was a decrease in our standard of living. If that were true then we all got a huge raise in our standard of living this year as our dollar soared to 77 cents. The problem is that it was not true, the level of our dollar does not much affect our standard of living. It could only do so if our prices moved up as the dollar fell and down as the dollar rose. But there seems to be very little relationship between the dollar and inflation. At least within a certain range the level of the dollar does not affect us much. Of course it would have a big impact on anyone, including corporations, that does a lot of cross-border transactions.

The higher dollar will generally hurt companies that produce in Canada and sell internationally and will help companies (such as some retailers) that buy goods in the U.S. and sell their products in Canada.

Stocks To Buy

My approach, like that of many value investors, is to buy good companies at good (or great) prices.

It is not that hard to recognize a good company if you keep your eyes open. It’s not necessarily the companies that give you a great deal as a consumer, though it can be (i.e. Wal-Mart, Costco). It may be a company that is able to charge a premium price but still make a lot of sales. (Harley Davidson, Nike, Microsoft).

The trickier part is trying to figure out if the “greatness” of a particular company is already fully reflected in its stock price or not. If you want to attempt that, I would suggest a heavy course of reading of books on investing using fundamental and value based approaches (as opposed to charting or “technical” approaches). In addition, this Site has a number of articles on investing based on fundamentals.

The Strong Buys featured on this Site are up over 50% in 2003, and have consistently performed much better than the market, the past four years. There can be no guarantees that this will be the case in 2004, but the same careful, highly analytical approach will be used.

Right now the Site is featuring four Strong Buys. Three of these are dividend paying stocks which tends to indicate lower risk. I suspect that as a group these four will be very good investments (but there are no guarantees of course). Now is a good time to Subscribe to our Stock Picks since I will be making an extra effort to update all the stocks for January 1, in order to have a good base on which to measure results in 2004. In addition I will introduce a new model portfolio for January 1, which will have a goal of out-performing the market without taking excessive risks. The 2003 model portfolio is up about 34% in 2003. Individual stocks in the model portfolio rose an average of 48% but the portfolio lagged this due to some prudent profit taking to lock in gains.

INSIDER TRADING

It’s often not well understood that insider trading is not generally illegal. It is only illegal when insiders are in possession of material non-public information such as knowledge of a pending merger or acquisition transaction.

Some people would argue that company directors should not be allowed to trade the company’s stock. I find that ludicrous. To me, it is a very positive signal when directors or other insiders buy shares on the open market with their own money. Conversely it is a negative signal when they sell. As an investor, I would like to be able to know about these trades immediately. Strangely, but not surprisingly, I know of no company that issues press releases when insiders trade. However, in a brazen example of selective disclosure, some companies let stock analyst know about pending insider trades ahead of time. (They would argue that this does not constitute material information, so there was no need to tell the public directly).

In Canada until recently, it was not feasible for small investors to access insider trading data. (The data was not timely, was costly and was not presented electronically).

Finally, Canada now has a new System for Electronic Disclosure by Insiders. The Site has been described a bit clunky and you have to drill down several levels to find the data. The following link https://www.sedi.ca/NASApp/sedi/SVTItdController?locale=en_CA will take you directly to the part of the Site where you can find insider trade data by company. You just need to check the equity box and choose to search by company (issuer) name. This is really handy, insider trades are posted within 10 days of the trade. It’s a very good idea to check this Site before buying or selling.

A lot of the insider trades are under regular purchase plans or involve exercising options and then selling immediately. These trades are more routine and don’t offer much of a signal. I would focus on shares that are bought and sold in the open market. Also, if a guy owns 1,000,000 shares and sells 10,000 it may not be much of a signal. Look at the insider selling as well as how many shares the insider still holds.

With all this new access to Insider Trading, I suspect we will see a bit less insider selling. That is unfortunate. Companies that are in a bit of trouble may encourage insiders not to sell as it would drive down the share price, when investors saw the insider selling.

END

Shawn Allen
President
InvestorsFriend Inc.