Question: I'm in my late twenties. I got myself into some financial trouble after I graduated college due to misuse of my credit cards. I've since mended my financial ways. As I look forward to buying a home in the next five or so years, what can I do — if anything — to improve my credit score as much as possible? — Jonathan (Wheaton, MD)
Jonathan Hoenig: When it comes to finances, as so many parts of life, it isn’t what you say, but what you do that counts the most. A bad credit record can best be erased by demonstrating that you’ve indeed reformed your ways and are ready to pay your debts off in a timely fashion.
To start, I’d get a copy of my credit report from one of the major scoring agencies either Equifax, Experian or TransUnion. Any errors or discrepancies should be reported immediately — it might be that you are getting penalized for bills you actually have paid.
According to Fair, Isaac and Company, which developed the methodology on which credit scores are based, 35% of your rating is based on your payment history. So when it comes to bills, live like a financial saint, paying everything from the cable to rent on time. 30% of your score is based on amounts owed, which means it is vital to reduce balances on your outstanding debts, not simply shuffle them around. 10% of your score is based on requests for new credit, so you should most certainly borrowing money only when it is absolutely needed. Over time, your score will improve, as will your prospects for getting a more favorable rate on a mortgage. Good luck!
Question: My wife and I are planning to move to Phoenix. With all this housing boom/bust talk, and with Phoenix having done exceptionally well, should we buy a house or rent? Granted, I've read that over the long haul, owning is better than buying, but in your opinion, are we buying at Phoenix's peak? — Richard
Jonathan Hoenig: Regardless if you are filthy rich or just getting by, everybody needs a place to lay their head at night. To that end, while a home is most people’s biggest investment, it is also a necessity.
Where most people go wrong with any investment isn’t that their timing is off, but that they bet the farm. So instead of stretching with an adjustable-rate, no-money-down mortgage, my advice would be to find a home you can afford and buy it with the intention of holding onto it for at least a decade. “Flipping” properties is rarely as lucrative as holding onto them for the long haul.
Interestingly, there is evidence that the boom in residential real estate hasn’t ebbed yet. Many apartment-oriented residential REITs (real-estate investment trusts) have been stellar performers this year, including Equity Residential (EQR), Apartment Investment & Management Co. (AIV) and Camden Property Trust (CPT). My hedge fund has no positions in these companies at this time.
Question: Regarding the part of the president's State of the Union address concerning our addiction to oil, what are the best companies to invest in for alternative fuels, other than the oil sand from Canada? — Christine (San Diego, CA)
Jonathan Hoenig: As an investor, I worry about buying stocks whose story has already made it onto the front page. Often, by the time an investment theme is “discovered”, the real gravy has long been mopped up by the herd. To that end, my hedge fund currently has no positions in any of the “alternative energy” stocks that have recently come into vogue.
That being said, there are a number which have found great popularity with the fast-money crowd. One is Evergreen Solar (ESLR), a Massachusetts-based company engaged in the development, manufacture, and marketing of products such as solar cells, panels, and systems. With $800 million in market cap, the firm counts Fidelity, Merrill Lynch and Barclays Bank among its top investors.
Also getting a lot of attention lately is Pacific Ethanol (PEIX), a Fresno, CA-based firm engaged in the marketing, transportation, storage and delivery of ethanol throughout the western United States. Ethanol has been among the fuels most widely mentioned by the Bush administration as a potential new source of energy and apparently many savvy investors are stepping up with investment dollars. The company recently received an $84 million round of financing from Cascade Investment LLC, the private investment fund controlled by Microsoft’s Bill Gates.
Finally, you might want to take a look at FuelCell Energy (FCEL), one of the leading firms involved in the development of hydrogen fuel cells electric power generation. This volatile small-cap has been in a channeling pattern since last summer — if the stock could break above $12 it might have a chance of eclipsing the 2004 highs near $20 a share. Not everybody shares an enthusiastic view: Smith Barney Citigroup recently rated the shares a “sell.”
Question: What is going on with the Fidelity Contra mutual fund? It has taken a sharp nosedive in the last few weeks. I know it holds lots of Google stock. — Mary Ann (Macon, GA)
Jonathan Hoenig: In a business where everybody is looking to outsmart the next guy, it takes a lot of cajones to consider yourself a true contrarian on Wall Street. Contrafund, one of Fidelity’s most popular offerings, purports to invest in undervalued situations not yet on the radar screen of other Wall Street players.
And while Contrafund hasn’t fallen off the map, it has recently been clocked by one simply problem: lousy stock picking. Recently weak Google (GOOG) is a major holding, along with another widely owned internet stock that’s been under pressure, Yahoo! (YHOO). It has also been hurt by large holdings in energy stocks like Encana (ECA), Exxon Mobil (XOM) and Valero (VLO).
While mutual funds are, by nature, long-term investments, it’s worth noting that, at $64 billion in size, the Contrafund is hardly nimble. For those looking for a real contrarian perspective, a smaller, more agile option could serve as a better fit.
Question: What's your opinion on XM Radio for the long term? Is last week's stock trouble a bad sign for the future? — David (New Haven, CT)
Jonathan Hoenig: You’ve got to be careful when thinking about “the long term” when it comes to stocks, because “the long term” starts in the here and now. The best indicator of how a stock will act in the future is how it’s acting today. XM Radio’s recent weakness is reason for caution.
And although one might argue the outlook for satellite radio is bright, the company appears to have several hurdles to overcome. Last week XM reported a fourth-quarter loss of $268 million dollars, and even news that they signed Oprah Winfrey to host an entire channel couldn’t keep the stock from sliding 10%. More troubling was the disclosure that director Pierce Roberts resigned, warning the board there is “a significant chance of crisis on the horizon.” For now, I’d take the man at his word and steer clear. This might be one case where the product is better than the stock.
Question: What do you think of eBay, Kellogg's, and Pepsi (EBAY, K, PEP)? Are they a buy, sell, or hold? — John
Jonathan Hoenig: More than any other factor, the biggest influence on your trading success isn’t what you buy, but how you buy it. Position size, stop-loss orders, diversification and other trading techniques will have a much bigger impact on your portfolio than simple “buy, sell, or hold.”
That being said, I’m happy to offer my two cents on the three names you mentioned, none of which are currently held in my hedge fund. eBay (EBAY) is a terrific company with a killer product, but lately a fairly soggy stock. Like Google (GOOG) and Amazon (AMZN) and Yahoo! (YHOO), this internet bellwether has been in a holding pattern lately. I’d want to see the stock, currently near $41, to strengthen more towards $50 before taking an initial position.
Kellogg (K) is more intriguing. Although many food-related stocks, such as Pilgrim's Pride Corp. (PPC), Hershey Co. (HSY) and JM Smucker Co. (SJM), have been terrible performers lately, Kellogg has shown remarkable resilience. This is thanks to a stable of strong brands like Special K, Eggo waffles, Cheez-It crackers and my personal favorite, Frosted Mini-Wheats. The first rule of trading is: don’t fight the tape. Kellogg has shown a strong bid here and I most certainly would consider it for purchase as part of a diversified portfolio.
Similar story at PepsiCo (PEP), which has smartly hedged their soda bets by dominating the snack business as well. Quaker Oatmeal, Aunt Jemima syrup, Ruffles Potato Chips and Life Cereal are among the products that have kept margins fat and profits on the rise. Their continued expansion into emerging economies should also keep the stock strong — there are still a lot of Indians and Chinese who have yet to find the prize at the bottom of a box of Cracker Jacks.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. He appears regularly on FNC's business program Cashin' In.