Archive for June, 2013

There’s been a big push in the United States towards renewable energy in the last 15 to 20 years. Although there are still critics, the fact is that US companies have put wind, solar and biofuel  at the forefront and they have started steadily trickling into the country’s energy mix. Still, renewable energy only makes up about 9% of total energy consumption today.

It’s been fascinating to watch, to say the least. Between 2000 and 2012, for example, wind generation skyrocketed from 6 billion kilowatt-hours (kWh) to 140 billion kWh and ethanol production has gone up from 3  up from 3 gallons in the same time. While that rapid growth might suggest that it’s not a good time for investors the fact is that there are plenty of opportunities open and this blog will focus on 5 of the best of them. Enjoy.

With wind comprising nearly 60% of their 17,771 MW of total capacity, NextEra  is the largest supplier of wind energy in the country. Not only that but nearly 95% of all the energy that they produce is from clean, renewable resources. NextEra has also been one of the key players in the United States adoption of wind energy and is geared towards the future and major growth.

One of the leaders in America’s biodiesel market, REG  is a company that has been undervalued for practically the entire time it’s been on the market. Many argue that their current share price doesn’t account for their gross assets that will be coming online over the next several years. One telling sign is that they reached $1 billion in annual revenue in 2012, the first time they’ve ever done that. Not only that but they are on a pace to be the suppliers for 25% of the biodiesel sold in America in the next few years, something that makes their stock very alluring.

SunPower  is a solar energy company that has certainly seen their fair share of ups and downs over the last 5 years along with many of the people who invested in the solar market. The trend seems to be reversing however as the residential solar markets have climbed so far this year, a good sign that their profitability will be increasing. Add that to the fact that solar panel efficiency should increase by 23% in the next two years and SunPower starts to look like a great opportunity indeed.

When they became the third largest ethanol producer in the United States, Valero joined the list of renewable energy companies even though they’re the nation’s 3rd-largest refiner. The fact that they have acquired 10 state-of-the-art bio refineries in the last few years is also a sign that they’re in it for the long run as well as the investments that they have made in next generation biofuel technologies. Interestingly, Valero installed a 50 MW wind farm in Sunray, Texas in 2009 to provide power to one of their 70-year-old oil refineries. Talk about playing the game from both sides of the field.

Lastly there’s Waste Management,  another company that might have you scratching your head when you think about renewable energy but the fact is that they’re developing a huge portfolio of waste-to-energy technologies that will allow them to more efficiently use the garbage in their landfills. And when we say ‘use the garbage’ we mean use it to produce compressed natural gas fuels, man-made carbon sinks and clean electricity. Indeed, their landfills produce more electricity than all of the American solar industry put together, enough to power more than 2 million homes and offset almost 4,000,000 tons of coal. That’s huge and makes them a solid investment.

Top energy experts today still don’t believe that we will ever live in a world that generates more power from renewable energy than it does from fossil fuels. That being said, there are plenty of ambitious companies that are trying to change that thinking and this ambition equals many opportunities for investors. When you consider that wind energy, if it could be stored during off-peak hours and used when usage peaks, would technically be enough to power the entire United States, you can clearly see that investing in renewable energy does have a nice ring to it.

Are Diamonds an Investors Best Friend?

Diamonds may be a girl’s best friend (as the song goes) but they can also be an investor’s friend as well. Investing in diamonds isn’t as difficult as you might think and can add an asset to your portfolio that, historically, has shown great stability.  It’s for this reason that we put together a blog today to give you tips about how to invest in diamonds, what types of diamonds and also time and opportunities to look for and even what to look for in a particular diamond.

There are certainly no lack of options when investing in diamonds. You can invest in different stocks, funds and even the pretty little stones themselves. Rio Tinto (RIO), jewelry retailer Tiffany (TIF) and also the online diamond sellers Blue Nile  (NILE) are some of the most well established and well-known names in the diamond industry as far as equities are concerned. If you’re talking about funds you have J.P. Morgan Global Natural Resources as well as First State Global Resources. Both of these funds can definitely give you some exposure to diamonds.

Frankly, the best way to get into diamonds as an investment (and also the best way to make a profit) is to buy diamonds directly from a diamond wholesaler. If you don’t have very much experience you should consider asking an expert to help you until you do because you’ll definitely have questions about pricing, the origin of any diamond that you’re thinking of purchasing and also the type of expertise that the jeweler who’s selling the diamond to you has and how long they have been in business.

There are also the 4 C’s of diamond buying, carat weight, clarity, color and cut. These four factors  will determine just how good your diamond (or diamonds) are and should be looked at very closely. (Having an expert here to help you while you are learning is again an excellent idea.) By the way, the Gemological Institute of America is the Institute that developed the 4 C grading system and their certificates are well known and accepted internationally.

There are a number of different companies that you can contact that operate essentially as ‘matchmakers’ between suppliers and individual buyers. Most of these are in larger cities like New York and deal with suppliers in the United States but also in Belgium, Israel and India, among others. If you hire one of these companies to help you they will determine what type of diamond that you can afford and, hopefully, lead you to the best diamonds that are available in your investment budget. Keep in mind that there are a large number of participants in the diamond market as well as a wide variety of these precious stones. Some will be better than others and the trick is to get the highest quality that you can for the lowest price. (Isn’t that always the trick?)

Education is the key to any investment opportunity and for diamonds it’s no different. If you’re keen on reading up on the industry there are two trade publications that report on pricing and trends. They are Rapaport.com and Idexonline.com. The industry actually uses the diamond prices that Rapaport publishes as their benchmark. What’s interesting about the diamond market is that it is not as massive  as some people think it is. Potential investors would do well to look at as much historical data as possible and also research the future forecast of the diamond market. Once done the niche markets should be researched as pricing as well as liquidity can differ dramatically between the different niches.

Pink diamonds are a great example. From the Argyle mine in Australia they have increased in price because of waning availability from the specific mine that they come from. What this means is that it’s probably too late to invest in them right now. On the other hand the Asian and Indian diamond market, and their propensity for higher clarity diamonds, has grown dramatically over the past decade and forecasters see it continuing to grow. What that means is that investing in near flawless diamonds (the kind both markets like) can be considered a good investment.

Another bit of knowledge that you will find helpful is that the average markup on diamonds that are purchased directly is between 10% to 20% and only for Gemological Institute of America  certified diamonds.

When it comes to fancy color diamonds the rules of the game change a bit as these diamonds are more like art than stones. What we mean by this is that, like a painting by a specific artist, the beauty (and thus the price that someone is willing to pay) is in the eye of the beholder. Since these diamonds are incredibly rare their prices do not have a benchmark on the Rapaport Price List  like white diamonds do and so a  fixed markups trend is not available.

Maybe the most important thing to realize is that diamonds are a physical asset and thus when it comes time to sell there are challenges and logistical hurdles to be handled. If you’re looking for quick liquidity then you probably should not be looking at diamonds as the process of selling them (and the problems) can be compared to selling real estate. With diamonds there is almost always a ‘right’ buyer out there but you need to be patient in order to find them.

Like any investment opportunity, investing in diamonds is something that takes time to learn, research and practice. We hope this blog gave you some insight and valuable information to get started and we wish you good luck with any investment that you make. Please make sure to come back and visit us often for more interesting and (hopefully) valuable financial information. See you then.

Some Vital Keys to Successful Investing

Many new investors spend their time trying to find the next great interesting opportunity without first learning the basics about investing. This can be a little bit like trying to ride a motorcycle if you’ve never even learned how to ride a bicycle. Sure, you may get the hang of it after a while, more than likely you’re going to fall flat on your face at least a couple of times.

With that visual note in mind we thought we put together a blog that features some vital keys to successful investing. If you are a new investor this should be required reading and, if you fancy yourself an accomplished investor, you may want to take a few minutes and look it over as well. You never know, you might pick up something valuable. Enjoy.

One of the most important of these vital keys is that you leave a margin of safety in your investment strategy so that you protect the most important part of it; your portfolio. There are two main ways that you can do this.

  1. Always be conservative when you’re talking about valuation and try not to assume too much. The risk here is not that you’re going to overpay for an excellent business but rather that you will end up paying more than you should for a mediocre business. When it comes to estimating future growth rates it is best to err on the side of caution.
  2. When purchasing any asset only purchase one that is trading at a substantial discount. If you’ve done your homework and conservatively estimated a stock’s intrinsic value should look for an extra margin of safety as well.

Another vital key is to only purchase businesses that you fully understand.  Is only when you understand the business that you can estimate their future earnings. For example, a company like Hershey’s that makes chocolate will rise and fall with the cost of sugar. If you know this, and you know what it takes to produce their main product, you’ll be in much better shape to decide if they’re a valuable addition to your portfolio or not.

The best way to measure your success with any investment is to take a look at the underlying operating performance of the business that you are purchasing. Simply put, the operating results and the share price will, over time, become inextricably linked. Although it may not start out that way, the underlying business and the price of its stock almost always go hand-in-hand.

When it comes to investments there is one rule that is unavoidable; the more you pay for any asset in relation to what it turns, the lower your return is going to be. For example, a stock that you might consider a terrible investment at $50 a share you might just consider an excellent investment at $15 a share. The fact is, if you’ve done your research, have the aforementioned margin of safety in place and the long-term economics of the business are very favorable you may just view a decline in the company’s stock not as a bad thing but as an excellent opportunity to acquire more. Frankly, if all of these things weren’t in place when you first purchased stock in there there’s a good chance you probably shouldn’t have purchased it in the first place.

One mistake that many new investors make (and some that have considerable experience as well) is to trade too frequently. What happens when you do this is that you substantially lower your long-term results. Why? Because fees, taxes, commissions and ask/bid spreads create what is known as frictional expenses, something that can eat up your returns like termites can eat up your house.  Even a 2% increase over 40 years could mean a significantly lower number in your retirement account when you’re ready to start golfing full-time. Simply put, frequent activity when it comes to investing can be the enemy of excellent long-term results.

The last thing we like to talk about today is the fact that, as an investor, you need to keep your eyes open for new opportunities  at all times. If you’re always scanning the Wall Street Journal or the pages of Barrons or Fortune magazine something that you can add to your portfolio. Many new investors make the mistake of investing in companies that manufacture products or services that are outside of their knowledge base. Simply put, if you don’t understand the economics of an industry you will not be able to forecast where a business will most likely be within 5 to  10 years. If you don’t you really shouldn’t be purchasing their stock. (We learned this from billionaire investor Warren Buffett.)

What we’ve covered here today is really the basics but the basics are where the best investors always get their start. The good news is that you’ve already started learning and probably know more about investing strategies than many people will have much more experience than you do. Best of luck with your investing and, when you need more advice, tips and information, please make sure to come back and see us. See you then.

What are Incentive Stock Options

One of the perks of staying with the company for long time and working way up to corporate ladder that you can be offered stock incentives that, in many cases, will increase in value and afford you a huge amount of profit when you sell them. There are many different kinds of stock options and, depending on the type of company that you work for, how long you been there and how high up in the ranks that you are, the options available to you will certainly change. With that in mind we put together a small blog on one type of stock option that is offered once you make it to what will refer to today as ‘the big time’. Enjoy

A type of stock option that is usually offered only to key employees and those who are in top-tier management, incentive stock options (ISO) (also known as statutory or qualified options) allow these employees to receive, in many cases, superior tax treatment that can be quite enticing along with valuable stocks that they can sell down the road for high profits..

There are a number of scheduling details that one must know about incentive stock options.  The date that ISOs are issued is known as the grant date and the exercise date is the date when an employee that’s been offered an ISO exercises their right to buy them. After this second date the employee will then have the freedom to either get rid of the stock right away or hold onto them for a specific period of time.  10 years is the offering period for ISOs (unlike non-statutory options) after which time an employee’s option to buy the stock expires.

ISOs also contain something known as a vesting schedule which is usually three years. At this time the employee usually becomes fully vested and is open to taking advantage of all the options, including ISOs, that are available to him or her.

There are some things about ISOs that resemble non-statutory options including that an employee can either pay cash upfront to exercise them or can acquire them by using a stock swap with no cash changing hands. In some cases an ISO can be exercised at a price that is actually below the current market value, allowing the employee to make an in immediate profit if they choose to sell them right away.

A clawback provision is something that allows employers to take back ISOs if an employee leaves the company for any reason besides their retirement, placement on disability or death. This can also happen if a company suddenly becomes unable to meet its financial obligations with the ISO options.

As we stated earlier ISOs are typically offered only to executives and key company employees, a form of legal discrimination as most other types of employee stock plans are offered to any employee who meets certain minimum company requirements.  In some ways an ISO is similar to a nonqualified retirement plan that is offered to a company’s top people whereas a qualified plan must be offered to all employees.

As far as tax treatment, ISOs receive the most favorable tax treatment of any type of employee stock purchase plan, setting them apart from practically all other forms of compensation that is share-based. That being said, in order to be able to qualify for an ISO a company employee must meet certain criteria and obligations. One of these is a  qualifying disposition, when an ISO is sold at least one year after options were exercised and two years after the grant date. On the other hand, a disqualifying disposition is when the sale of an ISO, for whatever reason, does not meet the requirements of the prescribed holding period.

Similar to non-statutory options,  when an ISO is either granted or an employee is vested there are no tax consequences.  That being said, the rules concerning taxes for the exercise of an ISO and its sale can, in many cases, be quite complex. The bottom line is that an ISO will, in most cases, provide a substantial profit to its holder. In most cases if  they’re available to you the best thing to do be to consult your financial advisor or an HR representative from your company to find out what your options are.

We hope you enjoyed this blog about incentive stock options and that you will one day and work your way up to where you yourself can receive them. If you’re already there congratulations and we hope that this article has given you a little bit of insight as to how they work. In any case please come back sometime soon and visit us again as were always providing excellent blogs filled with equally excellent advice about all things financial. See you then.

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