Investment analysis involves the utilization of relevant ratios, craze analysis, and the opinions of researchers to choose how to allocate funds in a variety of investment vehicles. A review of the financial and regulatory factors influencing the industry in which the investor is interested. An examination of a company’s balance sheet to see if it’s maintaining a sufficient degree of liquidity, has a conservative capital structure, and it is making efficient use of its assets.
A study of a firm’s income declaration to see if it’s generating adequate gross margins and net profits, and is experiencing an acceptable and sustainable rate of sales growth. An examination of a firm’s declaration of cash flows to see if it is generating sufficient cash flows. A review of the disclosures that accompany the financial statements to see if the company is using conservative accounting procedures or is using “gray area” accounting to fudge its reported results and budget. After the analyzing the preceding information, one must determine the chance degree of the investment.
This includes the risk that dividends will change from current anticipations, in addition to that the sale price of the investment may drop from the initial purchase price. This risk is based on many factors, like the likelihood of new competition on the market, changes in technology, changes in government regulations, and changes in tax rates.
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The buyer must consider the likelihood of not having the ability to sell the investment for more than the initial purchase price. This may be a major concern whenever a security is traded thinly. It’s possible a decline in investor interest could trigger a sell-off of the asset in question, resulting in the investor incurring major losses at some later date.
The outcome of the investment evaluation also depends on the investment preferences of the investor. For example, someone nearing retirement is probably not interested in purchasing a startup company that there are reasonable potential customers of significant development for several years in the future, since there is also a risk of losing the entire investment.
Preferred, regardless of the reassuring name, are not risk-free. Issuers can cut or suspend preferred dividends, as a handful of REITs did during the financial crisis. And if an organization files for bankruptcy, bondholders take precedence over preferred traders. You can spread your risk with a fund that focuses on preferred.
John Hanstick Preferred Income (HPI), a closed-end fund, possesses considerably fewer financials than does the iShares ETF. 12, the fund traded at a 4% premium to its net asset value and yielded 15%. It would be better if the fund traded at a discount to NAV, however the modest high quality is acceptable.
Let’s face it: Recessions are not good for junk bonds and their issuers. Junk-rated companies are young, stressed, leveraged highly, or some combination of the three. So it is unsurprising that they suffer when sales kitchen sink and questions about their ability to service their debt mount. However the ongoing recession has been less discriminating than most. Previous junk-bond routs involved “bad companies with bad balance linens,” says Mark Durbiano, a manager at Federated Investors that has seen the nice, the bad, and the awful throughout a 25-year career buying high-yield bonds.
This time, he says, investors pummeled bonds of essentially good companies, such as First Data and SunGard, whose high debt lots earn them rubbish ratings. The average junk bond recently yielded 18%, a near-record 15 percentage factors more than Treasury bonds. But now, with indications that the economy is a bargain and thawing hunters nibbling, things up needs to look. The common junk-bond fund, which lost 26% this past year, returned 6% in ’09 2009 through April 9. The indexes — but not the whole sector — will need a temporary strike if General Motors, an enormous junk-bond issuer, defaults. High Yield (HYG) and PowerShares High Yield (PHB) — hold few or no GM bonds (but plenty of health and technology issues).
Each produces 10% or more. We’ve saved our lottery tickets for last. Scott Leonard, of Trovena, an advisory company in Redondo Beach, Cal., seeks out income-oriented closed-end funds in attempting but improving areas that are leveraged, offering at big special discounts to NAV. Dozens are eligible. Consider, for example, Cohen & Steers Energy and REIT Income (RTU).