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Yes the word of the week is a day late this week. Sorry. This week’s word is a common investing term that may not be that well known to new investors. That word is market capitalization. We hear this word all the time, but what does it truly mean? Market capitalization is essentially the dollar amount that the market values a company at. This sounds all well and good, but how does one figure out what the market values a company at? The answer to this is quite simple really. Market capitalization is determined by multiplying the number of outstanding shares by its current price.

Say company WXYZ is trading at $20/share and has 1 million shares outstanding. The market capitalization for WXYZ corporation is $20/share x 1 million shares = $20 million. So we can say that the market values WXYZ at $20 million.

Friday morning when I got to work I had an email from our Financial Analyst. Typically when I get an email from her it means that we have changed an important rate. This email said that we would be lowering our CD rates once again effective February 11th, 2008. All across the board we lowered them by 20 basis points (a basis point is 1/100th of a percent) with the exception of our 6 month CD which we keep at such a low rate that no rational investor would ever put money in them. Our rate for CDs over 6 months dropped from 4% to 3.8%.

This drop in savings rate shows our desire to stay consistent with a market that has seen the federal funds rate cut twice over the past month. Our rate cut can be seen as a blow to our members who may have CDs maturing soon. Over the past few months I have seen people coming in droves to cash out their matured CDs because they cannot afford to keep them in savings.

While this exodus of funds is not what we are striving for as a financial institution, you can’t really blame the customers for wanting to take their money out. At such low rates the money one makes in these low yielding CDs will barely keep up with inflation.

So what to do if you have a lot of money sitting in savings accounts right now? Well CDs and savings accounts are not really the place to be right now. You can do a bit better with some bonds, but not a whole lot. It is also hard to tell what direction the stock market is headed in right now, so that is probably not the best place to put your funds, especially if you are not one to take on risky investments.

Many mutual funds have been down this year, but here is a consistent performer that is not super risky. Its’ return for the year so far is -0.69%, but this isn’t bad compared to many funds that are at -12% for the year. The fund that I am suggesting is the Fidelity New Markets Income Fund (FNMIX). This fund avoids much of the risk of the stock market by investing in international bonds.

Here are the returns for this fund over certain periods of time:

Although this fund has been slightly down for the year, it can be seen that is has been a consistent performer over the years. If you are considering cashing out a money market or CD sometime soon, be sure to check this fund out before you commit to something else.

The minimum investment for this fund is $2500

This fund is currently trading at $14.49. I highly recommend this fund with a rating of 4.5/5, because of its investment in international bond funds. The fund eliminates the risk of the stock market, while earning higher returns, because foreign bonds currently have better returns than US bonds.

I currently do not own this mutual fund. For a list of my current investments, click here. To view a list of my current recommendations, click here.

Anyone who has taken a course in economics knows about the theory of normal and inferior goods. For those new to this theory, here is how it works. People tend to be drawn to consuming higher quality items in times of economic prosperity. Consumers have an abundance of money, and therefore have more money to spend on higher quality items. These items are known as normal goods. In times of economic recession, consumers shift their spending habits towards more cheaply priced items in order to  save money. These cheaper items are called inferior goods.

Food can be used as a great example to show the difference between normal and inferior goods. Suppose a person has a good job and are making a lot of money. They could buy normal goods like steak and seafood for dinner every night because they have the means to do so. Suddenly the economy takes a turn for the worse and they get laid off and are forced to take a minimum wage job to make ends meet for the time being. With a lower income they won’t have as much money to spend on normal goods such as steak and seafood. In order to conserve money they will switch to eating inferior goods like hamburger meat and hot dogs.

In the economy, companies that produce normal goods like steak and seafood will see their revenues decrease because less and less people can afford to purchase them. Companies that produce inferior goods like hamburger meat and hot dogs will see their revenues increase because now more people are forced to buy these products.

In times of recession, like we are currently reported to be heading into, companies producing inferior goods can stand to prosper from this economic environment. In honor of this current economic downturn, I am going to be reviewing some companies over the next few months that are generally considered to be producers of inferior goods. These companies could stand to gain in value while the rest of the market is dropping.

At the credit union there are a few select people who like to come in and buy the new packs of dollar coins. The US Treasury has been issuing new golden $1 coins with different presidents on them. According to the coin production schedule from the US Mint, they will be producing new dollar coins in the President Series up until 2016 finishing with President Gerald Ford. The coins in the image above will be produced throughout 2008, so keep your eyes out for them. Some people buy them for their collection and others buy them for gifts. These coins will likely never make it out of their homes. There is another group of people that purchase these coins for the sole purpose of distributing them out into society. They tell me that they think the coins are cool and a good idea because the life of a dollar bill is so short. According to PBS, “the average life of a dollar bill is eighteen months. Five dollar bills last about fifteen months, with twenties remaining in circulation for two years. Ten dollar bills have about the same lifespan as singles do, and the larger denomination bills can last up to eight years.” Coins obviously last a lot longer than this.I don’t think Americans as a whole are ready to accept the dollar coin as usable currency any time soon. The dollar coin has become a way of life in Canada though. Heck, they even have a two dollar coin. This system works for them because the dollar bill was discontinued, so people were forced to use the coin for purchases. The only way a dollar coin will be successful in the United States is if the dollar bill were discontinued.

In all of my purchases since the dollar coins began appearing since 2000 when the Sacajawea was first introduced, I have only received dollar coins as change once. I bought a couple of stamps from the Post Office vending machine with a $20 because that was all I had. When the machine made change for me there was about 18 Sacajawea coins waiting for me in the dispenser! I think I still have half of those coins because I forgot about them because they didn’t seem like real money to me. One of my co-workers refers to them as Chuckie Cheese coins. You have to admit that there is a striking resemblance.

Going back to the people who like to distribute these dollar coins. They feel that if they make purchases with dollar coins only they will start to gain acceptance in society. There are people that will purchase $75 worth of these coins at one time to accomplish this mission. Since I have never been offered a dollar coin as change before, this is what I think happens with them. The coin fanatics make their purchases with dollar coins. Stores don’t want them, but since the coin is legal tender they are forced to accept them. They have had negative experiences in the past giving dollar coins as change, so they don’t even bother with it. When it comes time to deposit their money in the bank for the week they send those dollar coins in with their deposit so they don’t have to deal with them anymore. The bank receives them as the deposit and then packages up the coins and returns them to the Fed for packaging into rolls.

That’s my theory anyway, but I am curious to hear what others think. In my opinion, the dollar coin will never be more than a collectors item until the dollar bill is done away with. Personally I don’t see that happening any time soon.

Overview: American Medical Alert Corp. (AMAC) was formed in 1981. They provide healthcare communication and monitoring services. The company’s main market is naturally the healthcare community. Up until 2000 AMAC’s business relied mainly on the sale of emergency monitoring devices. Since 2000 they have expanded their company to provide complementary call centers and monitoring services for their customers. People with medical issues enjoy the peace of mind of knowing that if they run into trouble they will have a friendly and knowledgeable representative to talk to with just the push of a button. As of the end of Fiscal Year 2006, the company has built or acquired 9 call centers around the country. These call centers are located to serve the Southern New England, Mid-Atlantic and Midwestern states. Currently the call centers and the personal emergency response systems made up the majority of the income fore AMAC.

The company has recognized a new emerging technology that they are highly invested in. This new technology is called telehealth. Essentially, telehealth is a remote monitoring system that patients can use to help doctors diagnose their illnesses without having to physically visit the doctor. According to American Medical Alert Corp’s website, “This vital information is automatically transmitted via standard telephone line to a secure, Internet-based, HIPAA-compliant software platform, the AMAC iCare Desktop™. Authorized healthcare professionals can access, view and interpret patient results and take proactive measures to promote early intervention and positive reinforcement.” The company believes that the aging baby boomer demographic will be more open to accessing healthcare services from home. The company estimates that chronic diseases will affect over 5.6 million Americans over the age of 65.

Beyond the emergency monitoring systems and the call centers, the company also has a product that will remind its users to take their medications. This can be especially useful for those patients with Alzheimer’s disease. According to the company, “10% of all admissions to hospital and 23% of all admissions to nursing homes can be traced to medication mismanagement.”

Review:

The Good: This is a Medical Alert company that has been around since 1981, so they are not some new and unreliable company that was recently created to cash in on the aging baby boomer population. This company has an established and trusting client base, with a positive reputation around the healthcare community.

The products and services that they offer rely on older people who are generally more prone to accidents. Playing into AMAC’s favor is the fact that they baby boomer population is reaching the age where it will be important for them to have the products and services that AMAC offers. An additional plus is that life expectancy in the United States continues to increase. This means that they will be able to provide their products to each individual customer longer on average than they did ten years ago. This should help to increase customer retention. If a customer is happy with the products and services that American Medical Alert Corp. offers, the only reason they will cancel is if they die. For the fiscal year 2006, 96% of the company’s revenues were generated through monthly recurring revenues (subscriptions). Obviously a longer life span is something viewed in a very positive light by AMAC.

As of February 2007, the company entered into an agreement with Wallgreens to be the provider of emergency response systems (EMR) for the store. These EMRs would be produced by AMAC, but branded under the Walgreens name. This would allow for the company to get more product sales under a more well known and nationally recognized name.

The subscription portion of their business, which provides 96% of the company’s revenues has been becoming more efficient over the years. Their gross margin in this segment has increased from 49% in 2004 to 52.5% in 2006. This number is especially impressive due to the fact that they have been opening new call centers over the past few years. It would seem as though the costs to train all the new employees would bring down this figure. It seems as though AMAC has become experts in opening new call centers.

The Bad: The company has been experiencing many technical difficulties with its’ telehealth products like the Health Buddy and the PERS Buddy. Although the company has been taking steps to fix these issues, this could deter some users from renewing their subscriptions, as well as create negative word of mouth advertising about the company.

The company generates 13% of total revenues through the government’s Medicaid programs. If eligibility and reimbursement restrictions were to change, it could adversely affect AMAC’s overall revenue. It is possible that changes in the Medicaid program could be advantageous to the company as well.

If you are hoping to obtain dividends from this stock, they do not plan on paying out dividends at any point in the near future. Depending on your outlook for this stock, this could be seen as positive since they will be reinvesting their profits into the expansion of the company.

The company’s revenues are heavily leveraged with their subscription services. 96% of the company’s revenues come from this portion of their business. If a few healthcare providers decide to switch away from them this could negatively impact all facets of the company’s operations.

As of September 2007, AMAC had $588,361 in inventories, but had only sold $339,778 in product. It seems like AMAC is producing far too much inventory. It doesn’t make sense to hold more in inventories than you can sell in three quarters. Changes in technology could make this inventory instantly obsolete. These inventories would be pretty much worthless to AMAC.

Opinion: American Medical Alert Corp. has a fairly solid business model. They are in the business of making sure the elderly can maintain the independent lifestyle that they are used to, while having the safeguard of having someone in the medical field be only the push of a button away. Although this is nice business model it is not unique only to them. There are many other companies out there that provide the same services. Judging by the consistent increase in revenues by the company, they have managed to stand apart from the competition. With the aging population, they should have customers for life once they decide to join their service.

I would like to see the company create more revenues from places other than just their subscription service. Their partnership with Walgreens should help to grow their subscriber base. It should also increase their product revenues as well. Having their product backed by a national brand like Walgreens should add some credibility to the company and should make it accessible to more people.

Rating:

Market Sector: Once again, with the increase in age of the baby boomers, the company should be able to take advantage of a long term subscriber base. This market will be growing, and naturally we should expect to see a lot of new entrants into this market hoping to make and easy buck off this emerging market.

Potential: AMAC has a decent amount of potential. For them to truly expand, they need to expand their operations across the country. Rather than pay out dividends, it seems like the company has been investing their profits back into themselves by buying up additional call centers to better help their growing subscriber base. Since AMAC has teamed up with Wallgreens, now would be a good time to begin to expand nationwide now that the product has become available to more and more people.

Risk: AMAC actually has a decent amount of risk associated with it. They have invested a lot of money into the call centers, but ever changing technology could have an negative impact on the call center environment. A large amount of the debt on the company’s financials is related to the expenditures on additional call centers. If call center technology becomes obsolete, AMAC could be paying off defunct call center related debts for quite some time.

Conclusion: 3. The company has consistently improved revenues quarter after quarter. If it can correctly position itself over the next 5-10 years for the retirement of the baby boomers, they should be able to easily cash in on the situation. I don’t see the stock making a large price jump any time in the near future, but rather see it steadily increasing over the coming years. I see this stock as more of a buy and hold for the long term. This stock should be a steady performer over the coming years and a nice addition to a portfolio.

Note: As of 2/4/2008 I do not have any financial investment in this company. For a current listing of the stocks and options that I own, click here.

It’s Sunday again, and you know what that means…time for another word of the week! This week’s word/term is “intangible assets.” Intangible assets are things owned by a company that you cannot see or feel, but are very important to the operations of a company. One example of an intangible asset could be a trademark. A trademark allows a company to give itself an identity that cannot be copied by other corporations. Pepsi for example has a trademark on their red, white and blue ball symbol. The company has spent years making that symbol a recognizable representation of the company. There is obviously some value attached to the trademark that prevents other companies from using the Pepsi symbol, and therefore the company must account for this. Intangible assets are listed in the “Other Assets” category of the Balance Sheet. Other intangible assets include: patents, franchises or brands.

Mutual funds can be a great way to diversify a portfolio. A mutual fund allows an investor to put their funds into many different stocks at once without having to research a bunch of different companies. This can be a great way for a novice investor to get into investing. Instead of you managing your portfolio, the mutual fund manager will in a sense manage the fund for you. Another great thing about mutual funds is that you can achieve great diversification without having to pay hundreds of dollars in commissions.

The fund in particular that I am reviewing today is the Fidelity Freedom 2040 Fund (FFFFX). Fidelity has created a family of funds that are targeted for specific retirement dates. It is optimum if you choose the fund that is closest to your projected retirement date. The funds are set up in a way so that in their early years they are fairly aggressive, and as the fund gets closer and closer to the projected retirement date it gets more and more conservative. In the end this fund will merge with the Freedom income fund. This is how an investor should structure their investments, so it helps to take a lot of the guesswork out of allocating your investments.

The Freedom 2040 fund invests in a number of different Fidelity funds. As of the writing of this article, the fund is composed of:

Currently the fund is down 7.91% for the year so it is at a bit of a discount for those who want to get in on it. This drop in value could be explained because of the fund’s high investment in U.S. Equity funds while the U.S. market has been going through a correction. Over the past 5 years, the fund has produced a 14.59% APY. Based on the target date of 2030+, Morningstar gives the fund 4 out of 5 stars. Lipper gives them a 1 year ranking of 247 out of 1598 Growth and Income funds.

The minimum investment for this fund is $2500.

I currently have a financial position in this company. You can see all of my current positions here.

As always, I recommend that you do your own due diligence before investing in something. I always try to provide pertinent and trustworthy links so that this can be easily done.