How to Find Hot Stocks to Watch

The issue of how to find hot stocks to watch really is the million dollar question. While nobody has a magic formula for picking the hot stocks that will perform best, there are a few ways to go about tracking down hot stocks that have fairly good prospects.

Set your investing goals

Needless to say, chasing after hot stocks without a particular goal in mind isn’t a very sound financial strategy. Before you start looking around for hot stocks to watch, think about what you hope do get out of it. Consider how much money you want to make, how much you can stand to lose and how much you really need to get started.

Pick an industry

If you already know a lot about an industry with great growth potential, you’re in luck. In fact, you probably already have some ideas of which company’s stock to buy. If don’t know where to start, though, reading the business journals is the easiest way to pin-point industries that are picking up steam. Another approach is to list of few industries that at least mildly interest you and check into their growth potential. Sometimes, simply noticing which new products are increasingly popular can lead you to a hot stock.

Look for quality companies

While you definitely want to make sure any company you invest in has its financial house in order and no major problems brewing, that won’t necessarily be enough to tell you its growth potential Look into companies currently leading their industries and to what they’re doing right in terms of things like prices, quality, and customer service. Then look for similar companies that are just starting to emerge as winners.

Get advice

There’s a lot of research and analysis that goes into finding companies with great potential. No one can do it all alone. That’s why so many financial newspapers, magazines and newsletters publish lists of hot stocks to watch that even professional investors read. Track down one that best suits your investment goals and strategy and keep up with the stocks they pick. Just be careful where you get your advice. While getting stock tips from spam emails is obviously a bad idea, there’s also some danger in listening to stock promotions. These promotions are really just advertisements and may exaggerate the potential of the stock.

Be aware of scams

Promotions are one thing, but some of the tips out there on hot stocks to watch are outright scams designed to prey on inexperienced investors looking for quick profits. Think twice about accepting and stock tips from someone who has any immediate gains to make if you buy and verify any claims made, even if those claims sound realistic. Also watch out for stocks traded OTC or by Pink Slips as these stocks usually can’t meet the requirements most investors have.

Knowing where to look to find hot stocks to watch takes some experience, but by keeping tabs on growing industries and regularly reading the financial magazines and newsletters, you have a fairly good chance of finding a winner.

Three Micro-Cap ETFs Worth Considering

Do you remember the childhood wonder of looking at all the colorfully wrapped packages under the Christmas tree, trying to guess what fun was inside? If you were like me, your eyes were drawn to the biggest presents. And if they were too big to wrap, sometimes Santa would just leave them out in the open for us to find in the morning.

After awhile, I figured out that some of the best gifts came in small packages, nestled among the big boxes.

Exchange traded funds (ETFs) are the same way: Sometimes the best funds are unobtrusive, waiting to be noticed and enjoyed.

I’m talking about micro-cap ETFs.

You know that stocks are categorized by their size, or market capitalization (the dollar value of a company’s outstanding shares). Most often you hear about large-cap, mid-cap and small-cap stocks.

Last week I told you about mega-caps, the largest of the large caps. Today we’ll look at the other end of the scale: The smallest of the small-caps. We call them micro-caps.

As with other divisions, the line between small-cap and micro-cap can be fuzzy. Most analysts would peg it somewhere around $300 million to $500 million in market cap.

Any company can slip above or below that line at any time due to market action. Index providers like Dow Jones and Frank Russell compile lists and categorize stocks, making periodic adjustments.

What Can Micro-Caps Do For You?

The dream, of course, is that the stock you pick as a micro-cap grows up and becomes a small-cap, then a mid-cap, and finally a large-cap - multiplying your gains along the way.

When this happens, the rewards can be astronomical - thousands of percentage points! Realistically, though, your chances of picking just the right stock and then holding it all the way up are pretty slim.

This is where ETFs come in … micro-cap ETFs give you broad exposure to the whole category. If only a few of the stocks take off, they’ll pull up the indexes, and your ETF’s value can soar.

With a micro-cap ETF you’re losing some of the upside potential of the individual stocks, but you’re gaining diversification and thus reducing your risk. I think the trade-off is worth it. Plus, when the stock market takes off, micro-cap ETFs have the potential to go much farther and faster than large-cap or even small-cap ETFs.

Three Micro-Cap ETFs Worth Considering …

While several ETFs cover the micro-cap space, iShares Russell Micro-Cap Index Fund (IWC: 39.30 0.00 0.00%) is by far the most popular. With net assets over $300 million, IWC is the most widely-used way to gain diversified exposure to U.S. micro-cap stocks.

IWC tracks the Russell Microcap Index, which consists of 2,000 stocks. These include the bottom of the well-known Russell 2000 Small-Cap index along with 1,000 smaller stocks. IWC omits some of these stocks from its portfolio but still does a good job tracking the index results, especially considering how illiquid some of the component stocks can be.

Currently, IWC holds about half of its assets in three sectors: Financial services, technology, and health care. These sector weightings are similar to the broad stock market.

Two less popular ETFs also cover the micro-cap space.

• First Trust Dow Jones Select Micro-Cap ETF (FDM: 17.8892 0.00 0.00%)
• PowerShares Zacks Micro Cap Portfolio (PZI: 9.81 0.00 0.00%)

Either of these funds can also be a good choice, but IWC is much larger and more liquid.

Be Careful!

There’s a reason micro-caps have so much potential for outsized gains: They also have a big potential for losses. The daily volatility can be enormous. In fact, it’s not unusual to see these stocks swing twice the daily percentage of S&P 500 stocks. So timing your trades can be crucial.

Even though the micro-cap indexes include thousands of stocks, they only make up about three percent of U.S. market’s total capitalization. This makes it easy for unwary investors to become over weighted in these stocks. Therefore, micro-cap ETFs are best used for only a small percentage of your ETF portfolio.

Consider giving them a tiny slice and in time you may get a nice reward.

 

Two Reasons Why Gold Is Set To Decline!

As expected, the gold bugs were out in force, giving me a lot of heat regarding my prediction that gold will retreat to $1,000 in the near-term.

Thanks for all of your comments. There were some strong opinions as to why my thesis was incorrect. So allow me to offer my rebuttal and show you why I’m still right!

To quickly refresh your memory… my belief that gold is heading back to $1,000 is based on two arguments: technical and behavioral, let me explain…

Two Reasons Why Gold is Set to Decline

• Technical: The technical argument includes the fact that gold was +2 standard deviations above its 200-day moving average - something that only occurs 5% of the time. Additionally, put options are now more expensive than calls for the first time in two months. That tells me that the smart money expects gold to head lower. Check out my original column on why you should take profits on gold for a more detailed explanation.
• Behavioral: In this case, I mentioned that with the mainstream media covering gold ad nauseam, this is a sign of a top. Additionally, hedge fund manager John Paulson (with his enormous win betting against the housing market still in mind) has placed some huge wagers on gold going considerably higher.

It stirred up quite a debate on Investment U. The quotes below are taken directly from readers’ comments left on the page where my column appeared. As always, I invite you to leave yours here, too.

You Write… And I Respond

• Argument #1: “Comparing it to the 2000 stock bubble is ridiculous. The market was at absurd valuations back then, while gold would have to rise to over $2,000 just to reach an equivalent inflation-adjusted value compared to its 1980 high.“

My rebuttal: I’m not saying that the valuations are the same from 2000… just that we’ve seen a meteoric rise and now everyone is talking about it. When the “morning zoo” radio jocks are talking about gold instead of Tiger Woods’ latest escapades, that’s a strong hint we’re at a top. Even in stock markets, valuations at the top are often different, but the behavior of investors is usually the same.

• Argument #2: “It’s also evidence of your bias to be talking about Paulson being a ‘top-ticker’ on gold. Of course, you would never say anything like that if he made a stock sector bet of the same amount. You’d be talking about what a brilliant investor he is, and what a great track record he has.“

My rebuttal: If Paulson placed a huge bet on biotech, CNBC had a biotech index ticker running on its screen, and mainstream media that never cover financial news started talking about monoclonal antibodies, I’d say the same thing about biotech as I’m saying about gold.

On the other hand, if Paulson was buying an out-of-favor stock sector, you’re right, I’d say he’s brilliant.

Note that I never said a word about Warren Buffett’s huge play on transportation. That’s because no one is talking about transportation stocks and I have no reason to believe that from a behavioral finance standpoint, transportation stocks are overbought.

• Argument # 3: “Complete tripe! Gold’s not going up, printed money is declining in value due to QE (Ed Note: quantitative easing). You can’t print more gold and it’s a good hedge against the activities of rouge banks and gangster governments!“

My rebuttal: I have no problem with the fundamental reasons why gold should go higher. But my argument is based on gold being overbought, not the macro reasons behind the value of the metal.

• Argument #4: “I would suggest that if healthcare is your specialty, you should stick with that. You can ’sharpen the saw’ on fine tuning your skills in that area. Leave the gold market to the experienced. I think it’s unfair when somebody as yourself gets to use the public as a sounding board when they don’t have all their ducks lined up. I would further recommend that you get your analysis out BEFORE a correction if you really want to assist people with better entry points. When I picked up your piece, gold spot stood @ $1,121.“

My rebuttal: While I’m not a gold expert, I am pretty good with technical analysis and understanding market psychology. Those are useful tools for spotting trends and potential turning points in any market.

As for as the timing of the piece, I wrote it just as gold fell from its high and about 24 hours before we published the article. Unfortunately, the decline didn’t stop for our publication schedule and before you read the column. But if gold hits my $1,000 target, I think getting people out before a $121 correction is still plenty valuable.

• Argument #5: “Watching CNBC and reading most newsletters is a waste. It’s primarily about selling advertising and mining for the uninitiated subscriber that motivates these opinions, IMHO.“

My rebuttal: I actually agree with this statement. Do we want you to sign up for one of our products? Absolutely. Do we add a tremendous amount of value and help investors increase their returns from the stock market? I know we do.

But you don’t have to take my word for it. Take it from the tens of thousands of subscribers who receive first-class research and moneymaking recommendations from The Oxford Club and The White Cap Research Group every day.

Alexander Green is a sensational stock picker. Louis Basenese has nerves of steel and has proven to be one of Wall Street’s utmost contrarians. Karim Rahemtulla and Lee Lowell are the two best options strategists I’ve encountered in my 14-year career. And I’ll put my track record up against any one of them.

I’m extremely proud to be associated with this group of people. And I can tell you this: Not one opinion or investment idea is produced with the purpose of selling a subscription. The only goal is to make our subscribers money. If we don’t do that, or perform well for our subscribers, we wouldn’t be in business very long.

See you at $1,000.

Goldman Sachs Files To Create ETFs That Track Market Indexes

“Goldman Sachs Group Inc. (GS: 163.97 0.00 0.00%) is seeking regulatory clearance to create exchange-traded funds, a fast- growing segment of the money-management business. The company filed an application today with the U.S. Securities and Exchange Commission to establish ETFs that track market indexes. The initial fund will seek to replicate an index based on the Brazilian, Chinese, Indian and Korean stock markets, according to the New York-based company’s application,” Miles Weiss Reports From Bloomberg.

“Unlike traditional mutual funds, which are priced at the end of each day and report their holdings quarterly, ETFs trade on an exchange and are required to reveal the securities they own on a daily basis. ETF assets grew 64 percent to $783 billion at the end of November from $478 billion a year earlier, according to the Investment Company Institute in Washington,” Weiss Reports.

“The index for Goldman Sachs’s initial ETF will track the top 85 percent of companies by market value in China, Korea, Brazil and India, the filing said. A company not affiliated with Goldman Sachs will create the index, the filing said,” Weiss Reports.

 

Obama Passing A Blank Cheque To Fannie And Freddie

While Americans across the country hustled and bustled for last minute gifts and holiday preparations, our wizards in Washington tied a big red ribbon on a blank check made out to Freddie Mac (FRE: 1.26 0.00 0.00%) and Fannie Mae (FNM: 1.05 0.00 0.00%). In the process, a future of socialized housing finance has been increasingly solidified.

Why would the Obama administration pass this blank check under the cover of darkness on December 24th? In hopes that America had just settled down for its long winter’s nap and would miss this act of pillage and plunder. The Wall Street Journal highlights this ‘blank check’ in writing, U.S. Move to Cover Fannie, Freddie Losses Stirs Controversy:

The Obama administration’s decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday.

The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each.

Unlimited access to bailout funds through 2012 was “necessary for preserving the continued strength and stability of the mortgage market,” the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s.

“The timing of this executive order giving Fannie and Freddie a blank check is no coincidence,” said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed “to prevent the general public from taking note.”

Let’s take note. Let’s ponder this development. What exactly does a blank check and unlimited access to bailout funds truly mean? I envision the following:

1. A total lack of discipline and accountability in the distribution of taxpayer funds.

2. A full government takeover of the U.S. housing finance industry.

3. A socialized housing policy and accompanying programs.

If those developments do not revile you enough, the blank check is also a confirmation of the following:

1. A failed housing policy developed and promoted over the last twenty years.

2. The true legacy of those who fed from the Freddie and Fannie trough during the last two decades. Which legislative leaders piled their plates the highest with Freddie’s and Fannie’s payoffs? John Kerry (D-MA), Chris Dodd (D-CT), and Barack Obama.

Are you sick yet?

Blank checks are no way to run a country!! Capitalism has been under assault all year long and this year end shot is the ultimate kick in the balls.

These bums must be thrown out.

 

Ideas For High Yield Investment-Worthy Securities

For 2010, I believe that we will experience one of those years where the markets move sideways. Certainly there will be individual security and sector exceptions, but this article will focus upon a few random investment-worthy securities that you may wish to consider to obtain a high yield.

Here they are:

Alpine Global Dynamic Dividend Fund (AGD: 10.15 0.00 0.00%). Slaughtered in 2008 through most of 2009, this CEF appears back on its feet and presents an excellent monthly distribution with capital gain potential. AGD is also a modest hedge against a weak greenback. Trading at $10.15 with a market cap of $240m, AGD holds approximately 45% in U.S. securities and 55% in ROW. The fund at present pays a 13% yield.

Petroleum and Resources Corporation, a CEF, has been producing yield and total return since 1934. PEO fails to make headlines and talking head touts, but this well-run, conservative ETF annually throws out a total distribution between 7-12%. Trading at $24.02, PEO has a $570.4m market cap. It is presently trading at an almost 12% discount, so this may be a great time to consider PEO for your 2010 portfolio.

Barclays Convertible/SPDR Bond ETF (CWB). This ETF deserves more respect. This ETF tracks the >$500m Barclays U.S. Cnvertible Bond Index. CWB trades at $38.23 with a market cap of $237m. I like the holdings in this ETF, which may provide modest capital appreciation in addition to the nice yield, which is 5.67%.

IShares Preferred Stock Index ETF (PFF: 36.85 0.00 0.00%) tracks the S&P Preferred Stock Index. Trading at $36.85 this $3.1b fund yields 8.72%. It is by nature heavy into financials, but I do not believe that the integrity of PFF or its juicy yield are threatened. This is my favorite preferred ETF amongst the several available.

IShares iBoxx Corporate Grade Bond ETF (LQD: 104.58 0.00 0.00%) follows the iBOXX Liquid Investment Grade Index. Trading at $104.57, this $12.9b market cap ETF yields 5.24%. LQD is wildly popular, but there is a risk due to the lower investment grade ratings of holdings. That said, diversification and size does make this concern a small one.

I enjoy the hunt for juicy hybrid preferred stocks. Although some of the characteristics can be complex, if successfully researched, one can find high yields that appear to be mispriced based upon the underlying asset mix. A few examples:

Archer Daniels Midland 6.25% (ADMpfA) trades at $43.65 and yields 7.16%. Par is $50.00 if it is called.

Bank of America Preferrred Series J (BACpfJ) trades at $22.32 and yields 8.12%. Par is $25.00 if it is called.

National City Bank 6.625% (NCCpfA) trades at $22.29 and yields 7.43%. Par is $25.00 if it is called.

I do not want to create the impression that one should only invest for yield. Commodity ETFs such as DBC, foreign bond ETFs such s BWX, inflation-protected security ETFs such as TIP and a dose of precious metals and wisely purchased real estate should tendered as a portion of the well-rounded portfolio.

The author will not take an additional position, if any, on the above securities for seven trading days beginning December 26th, 2009.

 

Take Note Of The Santa Claus Rally And Other Year-End/New-Year Indicators

If Santa has not yet made his way to your investment portfolio, don’t despair. According to Jeffrey Hirsch (Stock Trader’s Almanac), the “Santa Claus Rally” normally occurs during the last five trading days of a year and the ensuing first two trading sessions of the new year. During this seven-day period stocks historically tend to advance (by 1.5% on average since 1950), but when recording a loss, they frequently trade much lower in the new year. Well, yesterday marked the official beginning of the Santa Claus Rally period, with the Dow Jones Industrial Index off to a 0.5% start.

Another old stock market saw tells us the first five trading days of January sets the course for January (known as the “First Five Days Early Warning System”), and if the month of January is higher, there is a good chance the year will end higher, i.e. the so-called “January Barometer”. Every down January since 1950 has been followed by a new or continuing bear market or a flat year. “As January goes, so goes the year,” said Hirsch.

Lastly, according to Hirsch, the “December Low Indicator“ says that should the Dow Jones Industrial Index close below its December low anytime during the first quarter, it is frequently an excellent warning sign of lower levels ahead. The number to watch is the low of 10,286 recorded by the Dow on December 8.

Time will tell whether the year-end/new-year indicators play out according to the historical pattern. Meanwhile, we’ll have some fun tracking how it pans out.

 

Positive Factors For Aerospace & Defense ETFs

The past year has kept the aerospace and defense sector subdued, but increases in spending and other global factors may make this sector’s exchange traded funds (ETFs) a top gun.

In the past month, the aerospace and defense sector has seen some gains in performance and more analysts are feeling bullish on the sector, according to Spade Index. Scott Sacknoff, the index provider for Spade Indexes, which is the underlying index for the PowerShares Aerospace and Defense (PPA: 17.225 0.00 0.00%), points out that the sector has been tracking the S&P 500 closely for most of this year. “Things that move the market move the defense sector.”

Some positive factors going for it include:

• Troops in Afghanistan. President Barack Obama is sending an additional 30,000 U.S. troops to Afghanistan to combat the growing threat of hard-core insurgents and Taliban foot soldiers, reports Al Pessin for VOANews.
• War Tax. Congress is flirting with the idea of a special tax on high-income Americans to help pay for the war efforts.
• Boeing’s 787 Dreamliner. The Boeing Co.’s (BA: 55.48 0.00 0.00%) 787 passenger jet “Dreamliner” made its maiden test flight on Tuesday, reports William Hennigan for The Los Angeles Times. The company promises that the Dreamliner will burn less fuel and last longer than other flying aircrafts. Airlines have already ordered 840 Dreamliners worth $140 billion, which made this aircraft the fastest-selling new commercial jetliner in history.
• Growing threats. Conflict doesn’t magically disappear and there will be a need to combat new threats by increasing offensive weapons.
• Economic expansion. Improvements in the economy will lead to job creation, economic growth and improved tax revenue that would help defense spending.

Sacknoff says that there are plenty of differences between perception and reality when it comes to the aerospace and defense sector. Sacknoff says that people tend to compare defense sector cycles alongside the U.S. economy. “The problem with making comparisons is that people tend to think we’re in a safer environment, and the world is not necessarily a safer place.”

A few cases in point: More troops are going to Afghanistan and a pullout, which could take awhile, isn’t expected to begin until 2012. We’re also still in Iraq. Iran seems unwilling to listen to the United States’ warnings, there are computer hackers working day and night to get into the government’s computers. “There’s still a lot of risk in the world,” he says.

Even after 2012, Sacknoff says, defense spending may not abate much as the government uses much of its defense budget to replace things left behind in the wars. That includes bullets, tanks and other equipment.

Many defense companies also benefit from diversification, Sacknoff points out. Many of them have their hands in commercial projects, cyber security and even clean energy. These companies are well aware of the cycles and have positioned themselves to cope as defense spending ebbs and flows.

• PowerShares Aerospace and Defense (PPA: 17.225 0.00 0.00%): up 22.8% year-to-date; Boeing is 6.4%

• iShares Dow Jones US Aerospace (ITA: 51.62 0.00 0.00%): up 25.8% year-to-date; Boeing is 7.4%