Have not posted in a while. Mostly holding on to the stocks I have now, not making many trades at the moment.
Finished The Intelligent Investor and You can be a stock market genius
On to Common Stocks and Uncommon Profits.
Here is another Seeking Alpha article: http://seekingalpha.com/article/577891-be-aware-of-the-facebook-first-day-trap
Sunday, August 5, 2012
Tuesday, May 1, 2012
Leverage is not a good way to maximize gains
Another quick thought -
Say you have a stock that went up from $30 to $45. You could have bought a $35 call option six months ago for $2.50. You made 50%, but you could have made 400%. Well, you're right, but you're taking on proportional risk to your investment by putting your money in a call option. Really it's similar to taking a loan for 3x your money and putting it all in one stock: with the loan, if it goes up 50%, you get 200% return. If it goes down 25%, you lose all your money. Beyond that you have to pay. With the option, if the stock stays below $35, you lose all your money. But you don't have to pay ever, which is a benefit over the leverage. The point being, options can be a good strategy if you find an arbitrage or a very cheap risk/reward profile. A lot of times traders use options as simulated leverage to maximize their risk and potential return. That is probably not the best use of the option strategy, and it can lead to heavy losses.
Say you have a stock that went up from $30 to $45. You could have bought a $35 call option six months ago for $2.50. You made 50%, but you could have made 400%. Well, you're right, but you're taking on proportional risk to your investment by putting your money in a call option. Really it's similar to taking a loan for 3x your money and putting it all in one stock: with the loan, if it goes up 50%, you get 200% return. If it goes down 25%, you lose all your money. Beyond that you have to pay. With the option, if the stock stays below $35, you lose all your money. But you don't have to pay ever, which is a benefit over the leverage. The point being, options can be a good strategy if you find an arbitrage or a very cheap risk/reward profile. A lot of times traders use options as simulated leverage to maximize their risk and potential return. That is probably not the best use of the option strategy, and it can lead to heavy losses.
Monday, April 30, 2012
Don't bet against John Malone
I owe a quarterly update. I'll do that on Friday or this weekend, as of 4/28.
For now - quick note.
Barnes and Noble announced an investment by Microsoft today of $300 million for 16%, valuing the Nook business at $1.7 billion. If there is one guy who is smiling right now it's John Malone.
That man has a better track record than Warren Buffett. When it comes to media companies, no one invests better than Malone. His annual return has to be astronomical.
This is the guy who bought Sirius XM radio right before it was going bankrupt - at 5 cents per share. Today that company is trading at over $2.
What is the investing lesson with Barnes and Noble? It's ok to follow someone into a trade if they are really smart and you understand their investment. But you have to read the SEC documents relating to the investment - in the case of Barnes and Noble, Malone purchased preferred shares at $17 a few months ago. The stock tanked to $10 immediately. Reading the SEC document, you can see that Malone gets paid is if the stock goes up. There's no other way for him to compound his return, because his interest rate was 8% annually, not enough to get him to bite unless he liked the underlying stock. So investing at $10 would have been a killer decision.
Today it's at $22, and it still appears to be a good investment. Microsoft just valued the Nook at $1.7 billion (Malone had to have a hand in that deal - the market cap of the whole company before MSFT investment was $800 million, so MSFT could have bought the whole company, then sold off the parts and kept 100% of the Nook business for itself for the same $300 million it just paid for 16%). In addition, Microsoft will promote the Nook app in Windows 8 - a huge deal, because that system will go into millions of homes. And the company's market cap is $1.3 billion as I write, $400 million less than MSFT valued the Nook, that's and not including the retail business which is profitable.
Good job again, Mr. Malone. And BKS is still a good buy.
For now - quick note.
Barnes and Noble announced an investment by Microsoft today of $300 million for 16%, valuing the Nook business at $1.7 billion. If there is one guy who is smiling right now it's John Malone.
That man has a better track record than Warren Buffett. When it comes to media companies, no one invests better than Malone. His annual return has to be astronomical.
This is the guy who bought Sirius XM radio right before it was going bankrupt - at 5 cents per share. Today that company is trading at over $2.
What is the investing lesson with Barnes and Noble? It's ok to follow someone into a trade if they are really smart and you understand their investment. But you have to read the SEC documents relating to the investment - in the case of Barnes and Noble, Malone purchased preferred shares at $17 a few months ago. The stock tanked to $10 immediately. Reading the SEC document, you can see that Malone gets paid is if the stock goes up. There's no other way for him to compound his return, because his interest rate was 8% annually, not enough to get him to bite unless he liked the underlying stock. So investing at $10 would have been a killer decision.
Today it's at $22, and it still appears to be a good investment. Microsoft just valued the Nook at $1.7 billion (Malone had to have a hand in that deal - the market cap of the whole company before MSFT investment was $800 million, so MSFT could have bought the whole company, then sold off the parts and kept 100% of the Nook business for itself for the same $300 million it just paid for 16%). In addition, Microsoft will promote the Nook app in Windows 8 - a huge deal, because that system will go into millions of homes. And the company's market cap is $1.3 billion as I write, $400 million less than MSFT valued the Nook, that's and not including the retail business which is profitable.
Good job again, Mr. Malone. And BKS is still a good buy.
Wednesday, April 4, 2012
Different= Profitable
I am in a fantasy baseball draft tonight. An auction draft. I was just thinking of how to draft my players. If I value players differently from the rest of the league, I have a better chance to win. Here is a demonstration:
The league is on ESPN. Most managers in the league will be using the ESPN.com predicted player values. Hypothetically:
Player 1: $36
Player 2: $34
Player 3: $30
Now, say I go to the Yahoo! Sports predicted player values instead. Hypothetically:
Player 1: $30
Player 2: $34
Player 3: $36
And then hypothetically, here is the true value of the players:
Player 1: $33
Player 2: $33
Player 3: $33
You can see that both rating systems have the same accuracy; they rate the individual players differently, but as a whole they have the same margin of error. If I use the second rating system, and the rest of the league uses the first system, here's how the auction will turn out:
Player 1: sold for $36 to another manager, worth $33, value captured = -$3
Player 2: sold for $34 to me or another manager, worth $33, value captured = -$1
Player 3: sold for $31 to me, worth $33, value captured = $2
So by using an alternate but equally accurate rating system, my team will be better than the rest of the league.
This principal applies to investing: By using a methodology that is different from what is popular at the time, as long as the methodology is no less accurate, you will make a profit. By following the crowd's reasoning, you will lose money.
The league is on ESPN. Most managers in the league will be using the ESPN.com predicted player values. Hypothetically:
Player 1: $36
Player 2: $34
Player 3: $30
Now, say I go to the Yahoo! Sports predicted player values instead. Hypothetically:
Player 1: $30
Player 2: $34
Player 3: $36
And then hypothetically, here is the true value of the players:
Player 1: $33
Player 2: $33
Player 3: $33
You can see that both rating systems have the same accuracy; they rate the individual players differently, but as a whole they have the same margin of error. If I use the second rating system, and the rest of the league uses the first system, here's how the auction will turn out:
Player 1: sold for $36 to another manager, worth $33, value captured = -$3
Player 2: sold for $34 to me or another manager, worth $33, value captured = -$1
Player 3: sold for $31 to me, worth $33, value captured = $2
So by using an alternate but equally accurate rating system, my team will be better than the rest of the league.
This principal applies to investing: By using a methodology that is different from what is popular at the time, as long as the methodology is no less accurate, you will make a profit. By following the crowd's reasoning, you will lose money.
Tuesday, March 20, 2012
Measurement
To maintain a prediction's integrity, the variable used to predict must be harder to change than than the thing it is predicting.
The very act of measuring something changes the thing being measured. You must measure something big or unusual to get it to stick. To preserve the integrity of your measurement.
One of two conditions must be met: (1) The people who control the prediction must not know about the measurement. or (2) It is nearly impossible for the prediction to be changed based on the measurement, or there is no reward for them to do so (this is rare).
Here are a couple of examples:
Example One
Let's say I want to predict a student's grades. The output is GPA. I believe I can predict a student's GPA in any semester by taking the weighted average of his course grades. This is an unchangeable fact. The integrity of the prediction is preserved, because it is impossible that the prediction could be changed by me or the student.
Say I want to break down the prediction further: I can predict a student's grade in an individual course based on the number of hours he spends studying over the semester. This measurement is not unchangeable. Its integrity is in question. If (1) the student does not know about me tracking his hours, then the prediction is ok. But if (1) is not met, neither is (2): The student, knowing that his GPA can be predicted by his hours, may start to put empty hours into studying, not fully concentrating on the material, thinking that he will get an A by putting the minutes in. The integrity of the prediction has been compromised. Over time, the prediction will become less accurate.
The prediction becomes much more muddled when compensation comes into play. Let's say I pay a student per hour studied, thinking that will improve his GPA. Bad idea! Further hypothesis: each student has a stock price tied to his grades. I invest in the students whom are undervalued based on the hours they have put in this semester. Ok. I succeed as long as my method is accurate. Now the market finds out about my prediction method. No good! The market will adjust, incorporating my method, and students with high hours will no longer be undervalued.
Example Two - A Stronger Measurement
I believe I can predict a nation's Olympic Medal Count based on its GDP. Props to Colorado College Prof. Daniel Johnson. It is harder to change a nation's GDP than it is to add to the medal count, so this is a strong predictor that cannot be compromised.
But Professor Johnson found that communist, centralized governments are more likely to get gold medals. If capitalist nations find out about the study, the prediction can go bad because those capitalist nations can mimick the training programs of other types of governments to increase the medal count.
A weak measurement
Any formula for picking stocks is predominantly luck. Say you invest in stocks that have crossed their 50-day moving average. Say you invest in stocks with low P/E only. No single formula to pick stocks has the strength and integrity to withstand the market once the market finds out the method is profitable. There are two ways to go about this: one, you have a small window of opportunity when the market does not realize it is overvaluing or undervaluing a particular formula. So, for example, generally a good time to invest in high-Beta stocks is after the market has gone down a lot. Because people get sick of losing money, and the market moves out of those guys unnecessarily. But if the market were to realize this arbitrage existed, it would disappear. The most sustainable predictor of stock price is to buy assets for less than they are worth. You must analyze the current assets and project the future cash flows of a company, and invest in what is most certain to bring you the most cash for your investment. That is a measure that cannot be corrupted by the market, because that is the heart of a business's value.
The very act of measuring something changes the thing being measured. You must measure something big or unusual to get it to stick. To preserve the integrity of your measurement.
One of two conditions must be met: (1) The people who control the prediction must not know about the measurement. or (2) It is nearly impossible for the prediction to be changed based on the measurement, or there is no reward for them to do so (this is rare).
Here are a couple of examples:
Example One
Let's say I want to predict a student's grades. The output is GPA. I believe I can predict a student's GPA in any semester by taking the weighted average of his course grades. This is an unchangeable fact. The integrity of the prediction is preserved, because it is impossible that the prediction could be changed by me or the student.
Say I want to break down the prediction further: I can predict a student's grade in an individual course based on the number of hours he spends studying over the semester. This measurement is not unchangeable. Its integrity is in question. If (1) the student does not know about me tracking his hours, then the prediction is ok. But if (1) is not met, neither is (2): The student, knowing that his GPA can be predicted by his hours, may start to put empty hours into studying, not fully concentrating on the material, thinking that he will get an A by putting the minutes in. The integrity of the prediction has been compromised. Over time, the prediction will become less accurate.
The prediction becomes much more muddled when compensation comes into play. Let's say I pay a student per hour studied, thinking that will improve his GPA. Bad idea! Further hypothesis: each student has a stock price tied to his grades. I invest in the students whom are undervalued based on the hours they have put in this semester. Ok. I succeed as long as my method is accurate. Now the market finds out about my prediction method. No good! The market will adjust, incorporating my method, and students with high hours will no longer be undervalued.
Example Two - A Stronger Measurement
I believe I can predict a nation's Olympic Medal Count based on its GDP. Props to Colorado College Prof. Daniel Johnson. It is harder to change a nation's GDP than it is to add to the medal count, so this is a strong predictor that cannot be compromised.
But Professor Johnson found that communist, centralized governments are more likely to get gold medals. If capitalist nations find out about the study, the prediction can go bad because those capitalist nations can mimick the training programs of other types of governments to increase the medal count.
A weak measurement
Any formula for picking stocks is predominantly luck. Say you invest in stocks that have crossed their 50-day moving average. Say you invest in stocks with low P/E only. No single formula to pick stocks has the strength and integrity to withstand the market once the market finds out the method is profitable. There are two ways to go about this: one, you have a small window of opportunity when the market does not realize it is overvaluing or undervaluing a particular formula. So, for example, generally a good time to invest in high-Beta stocks is after the market has gone down a lot. Because people get sick of losing money, and the market moves out of those guys unnecessarily. But if the market were to realize this arbitrage existed, it would disappear. The most sustainable predictor of stock price is to buy assets for less than they are worth. You must analyze the current assets and project the future cash flows of a company, and invest in what is most certain to bring you the most cash for your investment. That is a measure that cannot be corrupted by the market, because that is the heart of a business's value.
Sunday, March 18, 2012
Some trading action
Sold BAC.
Added to NYT, YHOO.
BAC still has room to go up potentially. But I sold it because it is a position that I followed somebody into. I don't know much about the stock, other than it was beaten down and cheap. Then Warren Buffett took preferred shares with a conversion at $7. So when the opportunity came to buy at $6.50, I said yes. I only do that for investors who I am confident know what they are doing. But my general rule is that when I merely follow someone into a trade, without fully understanding the business, I sell after a 20% gain. So out goes BAC with a nice, but small, profit.
In goes NYT. I really like them. They are differentiating themselves from the rest of print media. The paywall is genius. The writing is superb. The quality of research is excellent. The company is making money. It has a $1 billion market cap, and they own about.com (worth maybe $50 million), shares in the Red Sox (worth about $100 million), and the Boston Globe and International Herald Tribune (worth maybe $150 million). So the underlying business is selling for $700 million. They have about $550 million in employee pension liability. $3 billion in annual revenues. Profits are rising because of the paywall, and advertising is starting to bounce back. When you look at the newspaper industry, the Times stands at the top of all papers in the world, without a doubt, along with the Wall St. Journal and a couple others. They are well-managed. Trading at a 11x forward earnings. Large growth prospects if the paywall is managed correctly. I like it.
YHOO I am mostly following Dan Loeb into this trade. They own parts of Yahoo! Japan, Alibaba, and other international web sites worth more than their market value. He bought at $15, and the chance to buy months later at the same price is a nice opportunity. There are some tax regulations they would have to avoid if they were to sell the shares of their international companies. But he has a large position and a seat on the board and I trust his due diligence that he will be able to unlock the shareholder value. Like most of my "follow in" trades, if it gets to $18 (20% gain) I'll sell it. Another reason I like Yahoo! is because of the phenomenal research the Yahoo! Sports department does, which shows there is some value in the American branch of the company's operations. Yahoo! Finance is also a nice web site.
[Note - this was originally posted in March 2012. I am editing it in January 2013. It is interesting how far off I was on the value of About.com. The Times recently sold About.com for $300 million. If I had paid better attention to the quarterly reports I would have been able to value the About group better. Sometimes it helps to be lucky.]
Added to NYT, YHOO.
BAC still has room to go up potentially. But I sold it because it is a position that I followed somebody into. I don't know much about the stock, other than it was beaten down and cheap. Then Warren Buffett took preferred shares with a conversion at $7. So when the opportunity came to buy at $6.50, I said yes. I only do that for investors who I am confident know what they are doing. But my general rule is that when I merely follow someone into a trade, without fully understanding the business, I sell after a 20% gain. So out goes BAC with a nice, but small, profit.
In goes NYT. I really like them. They are differentiating themselves from the rest of print media. The paywall is genius. The writing is superb. The quality of research is excellent. The company is making money. It has a $1 billion market cap, and they own about.com (worth maybe $50 million), shares in the Red Sox (worth about $100 million), and the Boston Globe and International Herald Tribune (worth maybe $150 million). So the underlying business is selling for $700 million. They have about $550 million in employee pension liability. $3 billion in annual revenues. Profits are rising because of the paywall, and advertising is starting to bounce back. When you look at the newspaper industry, the Times stands at the top of all papers in the world, without a doubt, along with the Wall St. Journal and a couple others. They are well-managed. Trading at a 11x forward earnings. Large growth prospects if the paywall is managed correctly. I like it.
YHOO I am mostly following Dan Loeb into this trade. They own parts of Yahoo! Japan, Alibaba, and other international web sites worth more than their market value. He bought at $15, and the chance to buy months later at the same price is a nice opportunity. There are some tax regulations they would have to avoid if they were to sell the shares of their international companies. But he has a large position and a seat on the board and I trust his due diligence that he will be able to unlock the shareholder value. Like most of my "follow in" trades, if it gets to $18 (20% gain) I'll sell it. Another reason I like Yahoo! is because of the phenomenal research the Yahoo! Sports department does, which shows there is some value in the American branch of the company's operations. Yahoo! Finance is also a nice web site.
[Note - this was originally posted in March 2012. I am editing it in January 2013. It is interesting how far off I was on the value of About.com. The Times recently sold About.com for $300 million. If I had paid better attention to the quarterly reports I would have been able to value the About group better. Sometimes it helps to be lucky.]
Sunday, March 11, 2012
Smart investing, not just results
If a hedge fund investor chose a basket of the highest-priced tech stocks stocks in December 1999, then tragically died, and his fund had to be liquidated in March 2000 at a large profit based on inheritance laws, he was not a smart investor despite his profits.
If a Dutch basket weaver traded all of his machinery and inventory for a tulip bulb in January 1637, then was forced to sell it a month later in a dire need for cash, and he received a 25% profit, he was not a smart investor despite his profits.
To determine if an investment was good, one should examine reasoning behind it to see if it was sound and if it is repeatable. This means some money-losing investments were actually good, and some money-making investments were poor. Over time, if you make good investments, you will make money.
Computer running out of batteries. More on this later.
Keith Foulke - not just value.
Thursday, March 1, 2012
Timeline for an investment opportunity
I am reading a Joel Greenblatt book about the profits to be made in spinoffs, and I thought of this:
Each investment thesis has only a finite time when it is profitable. The market becomes more efficient as time goes on. I suspect that Greenblatt's spinoff methodology (look for illiquid, low-cap spinoffs with management continuing to hold shares) is not as profitable today as it was when he was a fund manager. That's because he publicized his ideas and strategy in a way that's easy to mimic. Therefore, smart traders did mimic it, and the arbitrage opportunities probably do not exist anymore.
The ultimate, unbeatable strategy is to compare the assets and cash flows you will receive to your investment price today. The investment that maximizes your future cash flows is the best investment. But even that has caveats: human error. The market gets more efficient with time. So what worked in the 1930s to 1960s (asset arbitrage - buying companies with more assets than their market cap, a la Ben Graham) is not as easy to find today. As the market gets harder to beat, individual investors have to be more precise in their predictions. The more precision required, the more chance for error and losses on investments.
That brings us back to the original post: there is no eternal competitive advantage, in investing or in business. You always have to innovate, and you don't know when you're going to lose your edge.
I still believe profits can be made in the stock market. It's just harder. Here are a few ways:
- Find market misconceptions, stocks that have been overshorted, or are too unpopular for no reason.
- Act on news that the market has not been able to digest yet. For example, there was a Kentucky bill last week to give Churchill Downs (CHDN) a near monopoly on in-state casino gambling. The stock price did not react that much to the bill, which was ultimately defeated. But that might have been a good purchase had the bill passed.
- Buy after a string of bad news that is not that bad (recency bias is in effect)
- Buy stocks that you are more familiar with than the rest of the market
- Know the rules: tax rules, rules for mutual funds and hedge fund investment. Find areas where the rules make some stocks unnecessarily cheap and make it so that they can't be purchased by a segment of the market.
Always know the reason why you are making profits. If you can't explain why, you can't repeat it, and it was probably luck rather than skill. Luck is never a good investment.
Each investment thesis has only a finite time when it is profitable. The market becomes more efficient as time goes on. I suspect that Greenblatt's spinoff methodology (look for illiquid, low-cap spinoffs with management continuing to hold shares) is not as profitable today as it was when he was a fund manager. That's because he publicized his ideas and strategy in a way that's easy to mimic. Therefore, smart traders did mimic it, and the arbitrage opportunities probably do not exist anymore.
The ultimate, unbeatable strategy is to compare the assets and cash flows you will receive to your investment price today. The investment that maximizes your future cash flows is the best investment. But even that has caveats: human error. The market gets more efficient with time. So what worked in the 1930s to 1960s (asset arbitrage - buying companies with more assets than their market cap, a la Ben Graham) is not as easy to find today. As the market gets harder to beat, individual investors have to be more precise in their predictions. The more precision required, the more chance for error and losses on investments.
That brings us back to the original post: there is no eternal competitive advantage, in investing or in business. You always have to innovate, and you don't know when you're going to lose your edge.
I still believe profits can be made in the stock market. It's just harder. Here are a few ways:
- Find market misconceptions, stocks that have been overshorted, or are too unpopular for no reason.
- Act on news that the market has not been able to digest yet. For example, there was a Kentucky bill last week to give Churchill Downs (CHDN) a near monopoly on in-state casino gambling. The stock price did not react that much to the bill, which was ultimately defeated. But that might have been a good purchase had the bill passed.
- Buy after a string of bad news that is not that bad (recency bias is in effect)
- Buy stocks that you are more familiar with than the rest of the market
- Know the rules: tax rules, rules for mutual funds and hedge fund investment. Find areas where the rules make some stocks unnecessarily cheap and make it so that they can't be purchased by a segment of the market.
Always know the reason why you are making profits. If you can't explain why, you can't repeat it, and it was probably luck rather than skill. Luck is never a good investment.
Wednesday, February 29, 2012
Tax Avoidance Article
Thanks again to Seeking Alpha, which published another article. Link and text below:
http://seekingalpha.com/article/400371-dodging-taxes-hold-garmin-mcdonald-s-and-visa-then-sell
I am no David Einhorn, but I was fortunate to have one of my stocks make a run recently: Garmin (GRMN) rose to $48 because of strong earnings, giving me a nice return from my purchase price of $33 in May 2011.
If you bought McDonald's (MCD) or Visa (V) in May, you are in the same boat that I am:
My initial reaction when Garmin hit $48 was to sell and reallocate the capital to another undervalued stock. But then I decided to channel my inner-Mitt Romney and research the capital gains tax laws before pulling the trigger on the sale. Capital gains are taxed at your regular income tax rate if the shares were held one year or less, but at a lower, special rate if they were held over a year.
By holding three months longer to reach the twelve-month plateau, an investor's tax burden on selling the stock declines. The following table demonstrates this for the 15% and the 33% tax brackets, assuming 1% transaction costs and share purchases at the May 2, 2011 price listed in the table above:
You can see that by holding the stock for a year, you are essentially paid a bonus by the government. Not bad. Of course, you are taking the risk that the stock might go down beyond the tax benefit, but then it also might go up.
Some clever investors may want to have their cake and eat it too: by shorting about three-fourths of his or her current holdings, an investor nearly can lock in the current price and wait to sell when the long-term capital gains rate hits, then cover the short for a smaller short-term gain or loss and pay fewer taxes as a whole. But the IRS does not allow this practice, with a prohibition against "wash sale" trades designed to turn maximize short-term losses and long-term gains. Wash sale rules prevent you from using tax losses on stocks you are short and long at the same time, or that you sell and re-buy within 30 days. For more info on wash sale rules, click here.
Here's a tax tactic that the IRS does allow: Say you bought one lot of shares in May and another in November. You want to minimize your taxes, but you also want to get rid of your shares as soon as you can. You can tell your broker or the trading web site you use to alter the cost basis calculation from first in, first out (FIFO) to last in, first out (LIFO). Then sell your November shares today. You will be taxed at the short-term rate for those shares. But you can sell your remaining shares in May to get the long-term capital gains rate on that lot and exit the position. Be sure that you do not employ dividend reinvestment on your shares, because that may cause the wash sale rule to kick in.
Even if you are a buy-and-hold kind of guy/gal not concerned about tax management, one quick tip: You may want to sell around October 2012. That's because the capital gains taxes for 2013 are increasing. This is an incentive for investors and fund managers to sell in late 2012 and capture gains while the tax rate is still low. In turn, those gains will prompt investors to sell their losing stocks as well to realize capital losses that further minimize the current tax burden. A Graham-and-Doddsville investor may choose to ride the wave, but someone who likes to play the market's ups and downs may want to consider selling shares before November '12 and jumping back in by late December.
Disclaimer: I am not a CPA. This is an opinion based on research. There could be wrinkles in the tax laws that my research did not reveal. I advise you to talk to an accountant about your specific tax situation before you wholeheartedly rely on this advice.
For those scoring at home, a reader sent me a message with another strategy that is an effective hedge against losses while you are waiting until twelve months pass: buy put options on your stock, then sell them around the same time you sell your shares. As long as your options are not deep in the money, you may avoid the wash sale rules:
http://bit.ly/xNobXv
http://seekingalpha.com/article/400371-dodging-taxes-hold-garmin-mcdonald-s-and-visa-then-sell
I am no David Einhorn, but I was fortunate to have one of my stocks make a run recently: Garmin (GRMN) rose to $48 because of strong earnings, giving me a nice return from my purchase price of $33 in May 2011.
If you bought McDonald's (MCD) or Visa (V) in May, you are in the same boat that I am:
| Stock | Garmin | McDonald's | Visa |
| Price on May 2 '11 | $34 | $78 | $79 |
| Price today | $48 | $101 | $117 |
| Percent return | 41% | 42% | 48% |
My initial reaction when Garmin hit $48 was to sell and reallocate the capital to another undervalued stock. But then I decided to channel my inner-Mitt Romney and research the capital gains tax laws before pulling the trigger on the sale. Capital gains are taxed at your regular income tax rate if the shares were held one year or less, but at a lower, special rate if they were held over a year.
By holding three months longer to reach the twelve-month plateau, an investor's tax burden on selling the stock declines. The following table demonstrates this for the 15% and the 33% tax brackets, assuming 1% transaction costs and share purchases at the May 2, 2011 price listed in the table above:
| Actual returns after short-term capital gains tax | ||||||
| Share price today | GRMN: $48 | MCD: $101 | V: $117 | |||
| Tax bracket | 15% | 33% | 15% | 33% | 15% | 33% |
| $ Realized per share | 45.49 | 43.06 | 96.69 | 92.73 | 110.30 | 103.67 |
| Actual returns after long-term capital gains tax | ||||||
| Price May 3 '12 | GRMN: $48 | MCD: $101 | V: $117 | |||
| Tax bracket | 15% | 33% | 15% | 33% | 15% | 33% |
| $ Realized per share | 47.52 | 45.49 | 99.99 | 96.69 | 115.83 | 110.30 |
You can see that by holding the stock for a year, you are essentially paid a bonus by the government. Not bad. Of course, you are taking the risk that the stock might go down beyond the tax benefit, but then it also might go up.
Some clever investors may want to have their cake and eat it too: by shorting about three-fourths of his or her current holdings, an investor nearly can lock in the current price and wait to sell when the long-term capital gains rate hits, then cover the short for a smaller short-term gain or loss and pay fewer taxes as a whole. But the IRS does not allow this practice, with a prohibition against "wash sale" trades designed to turn maximize short-term losses and long-term gains. Wash sale rules prevent you from using tax losses on stocks you are short and long at the same time, or that you sell and re-buy within 30 days. For more info on wash sale rules, click here.
Here's a tax tactic that the IRS does allow: Say you bought one lot of shares in May and another in November. You want to minimize your taxes, but you also want to get rid of your shares as soon as you can. You can tell your broker or the trading web site you use to alter the cost basis calculation from first in, first out (FIFO) to last in, first out (LIFO). Then sell your November shares today. You will be taxed at the short-term rate for those shares. But you can sell your remaining shares in May to get the long-term capital gains rate on that lot and exit the position. Be sure that you do not employ dividend reinvestment on your shares, because that may cause the wash sale rule to kick in.
Even if you are a buy-and-hold kind of guy/gal not concerned about tax management, one quick tip: You may want to sell around October 2012. That's because the capital gains taxes for 2013 are increasing. This is an incentive for investors and fund managers to sell in late 2012 and capture gains while the tax rate is still low. In turn, those gains will prompt investors to sell their losing stocks as well to realize capital losses that further minimize the current tax burden. A Graham-and-Doddsville investor may choose to ride the wave, but someone who likes to play the market's ups and downs may want to consider selling shares before November '12 and jumping back in by late December.
Disclaimer: I am not a CPA. This is an opinion based on research. There could be wrinkles in the tax laws that my research did not reveal. I advise you to talk to an accountant about your specific tax situation before you wholeheartedly rely on this advice.
For those scoring at home, a reader sent me a message with another strategy that is an effective hedge against losses while you are waiting until twelve months pass: buy put options on your stock, then sell them around the same time you sell your shares. As long as your options are not deep in the money, you may avoid the wash sale rules:http://bit.ly/xNobXv
Friday, February 24, 2012
The market will probably drop in the last quarter of 2012
The capital gains tax rate is increasing in 2013. The taxes that investors pay on winning stock positions will go up in 2013. So that is an incentive to sell toward the end of 2012. I think we will see a market correction at the end of this year. But is that enough to make it smart for investors to sell around the summer? It depends on the liquidity, the ease of buying and repurchasing, and your transaction costs.
Alternatively, Congress might pass a law that puts off the hike in capital gains taxes. That would make this point null.
Alternatively, Congress might pass a law that puts off the hike in capital gains taxes. That would make this point null.
Wednesday, February 22, 2012
Article
Thank you to the Seeking Alpha moderators who ran my last blog post as an article that I submitted to them. Here is the link:
http://seekingalpha.com/article/378271-9-stocks-to-take-advantage-of-the-market-s-misuse-of-discount-rates
http://seekingalpha.com/article/378271-9-stocks-to-take-advantage-of-the-market-s-misuse-of-discount-rates
Friday, February 17, 2012
The trouble with discount rates
Discount rates are an elegant way to whittle a three dimensional concept down to one dimension. But they are inexact.
For starters, a brief definition of a discount rate: A discount rate is a percentage amount by which you reduce future cash flows to calculate what they would be worth today. (My definition)
Investopedia's definition:
The interest rate used in discounted cash flow analysis to determine the present value of future cash flows. The discount rate takes into account the time value of money (the idea that money available now is worth more than the same amount of money available in the future because it could be earning interest) and the risk or uncertainty of the anticipated future cash flows (which might be less than expected).
For starters, a brief definition of a discount rate: A discount rate is a percentage amount by which you reduce future cash flows to calculate what they would be worth today. (My definition)
Investopedia's definition:
The interest rate used in discounted cash flow analysis to determine the present value of future cash flows. The discount rate takes into account the time value of money (the idea that money available now is worth more than the same amount of money available in the future because it could be earning interest) and the risk or uncertainty of the anticipated future cash flows (which might be less than expected).
Sunday, February 12, 2012
Small caps high cash
I used a stock screener at FinViz.com to pick out some cheap stocks by the numbers. They are very small cap stocks with low trailing price to cash flow or low price to book value. I will take a look at them one-by-one and post analysis on a few select ones to see if there are any good buys. Here is the list of cheap stocks:
But just because a stock is cheap according to multiples doesn't mean it's a good buy. The first stock I looked at from this list confirms this.
Company: Joe's Jeans
What they do: Sell expensive jeans, retail and wholesale. In the $120+ range. They design the jeans and pay a manufacturer to sew them together.
Competitors: Many competitors in this industry. For example, 7 for all mankind.
Why can't somebody else do what they do: Joe's designs their jeans well, as evidenced by these generally good reviews:
http://www.yelp.com/biz/joes-jeans-boutique-san-francisco
http://reviews.macys.com/7129/325960/joes-jeans-honey-boot-cut-jeans-gigi-wash-reviews/reviews.htm
I believe other companies can mimic Joe's success. Joe's has experience in the jeans field, but experience can be hired. They have a brand, but that is not too well known. I think they don't have much of a sustainable competitive advantage. But trends come and go, so maybe if they become a trend, the company could take off. But a general rule is to never invest in a conjecture. I don't know the first thing about fashion trends, so I am not going to put my money on a company hoping they go in style. It has to be about the numbers, or something that plays to the expertise of the investor.
Balance sheet:
Cash and equivalents $11.5 million
Inventory $24 million
Receivables, PPE $10 million
Payables $16 million
Net Realizable Asset Value, maybe $25 million
Net Income:
Trailing 12 months, negative $2 million
Trailing 36 mos, positive
Cut to the chase
Here is the reason I don't want to invest in JOEZ. Looking at their most recent quarterly report, they lost money on their retail sales, and they have upcoming lease obligations that increase from about 3.5 million per year to 4.5 million over the next five years. They have about 4 million options to grant, 6% of the total shares outstanding, which will probably be issued if the stock price rises. Right now many options are underwater so are not counted on the balance sheet. The reason the company has high cash is because it has a factoring agreement whereby it sells its accounts receivable. Not a bad thing, but it's not like the company is a cash machine on its own. Finally, the company has a profit sharing agreement with its top board member based on a 2007 licensing deal. It gives this guy 11% of its gross margin (Revs - COGS, NOT profit margin!) from 11 million to 21 million, and about 2% of all gross margin after that. With $80 mill annual sales, it's a slam dunk that gross margin will hit these levels, so the company is taking $1.6 million out of its annual profits to pay this licensing agreement. This is already a low profit margin business, and this licensing agreement will continue through 2017. So JOEZ is not a safe enough investment for me in particular. If I were a fashion aficionado and had inside information that Joe's Jeans would be promoted at the world-class fashion show in Milan, then I'd purchase some shares. But I'm not.
Remember, this doesn't mean the stock will go down or that it is a bad investment. It just means I am not comfortable enough with the company to put my money up for it.
| Industry | Name | Tick |
| Electronics Wholesale | ADDvantage Technologies Group Inc. | AEY |
| Home Health Care | Almost Family | AFAM |
| Sporting Goods | Aldila, Inc. | ALDA |
| Processed, Packaged Goods | American Lorain Corp | ALN |
| Health Svcs | American Caresource Holdings | ANCI |
| Wireless | ARC Wireless Solutions | ARCW |
| Property Management | AMREP Corp. | AXR |
| Communication Equipment | Blonder Tongue Labs | BDR |
| Biotech | Bionovo, Inc. | BNVI |
| Financial | Broadway Financial Corp | BYFC |
| Savings & Loans | Central Federal Corp | CFBK |
| Scientific Instruments | Digital Ally | DGLY |
| Footwear | Exceed Company | EDS |
| Savings & Loans | First Bancshares | FBSI |
| Regional Banks | First Community Bank Corp of Am | FCFL |
| Machinery | Gencor Industries | GENC |
| Insurance | Hallmark Financial Svcs | HALL |
| Technology | Himax Technologies, Inc. | HIMX |
| Electronics Wholesale | Infosonics Corp. | IFON |
| Regional Banks | Independence Federal Savings Bank | IFSB |
| Bus Svcs | Innotrac Corp | INOC |
| Apparel Clothing | Joe's Jeans | JOEZ |
| Scientific Instruments | The LGL Group | LGL |
| Regional Banks | MBT Financial Corp | MBTF |
| Regional Banks | Monarch Community Bancorp | MCBF |
| Electronic Equipment | Emerson Radio Corp | MSN |
| Medicla Instruments | NeuroMetrix, Inc. | NURO |
| Life Insurance | National Western Life Insurance Company | NWLI |
| Medical Instruments | Pro-Dex Inc. | PDEX |
| Regional Banks | Park Bankcorp | PFED |
| Periodical Publishing | Private Media Group Inc. | PRVT |
| Specialty Chemicals | REX American Resources Corp | REX |
| Regional Banks | Savannah Bancorp | SAVB |
| Credit Services | Security National Financial Corp | SNFCA |
| Semiconductor | Tegal Corp | TGAL |
| Regional Banks | Tower Financial | TOFC |
| Semiconductor Equip | Trio-Tech International | TRT |
| Savings & Loans | Teche Holding Company | TSH |
| Internet Information | The Street, Inc. | TST |
| Music And Video Stores | Trans World Ent. Corp | TWMC |
| Auto Parts | Tongxin, International | TXIC |
| Insurance | United American Healthcare | UAHC |
| Regional Banks | United Security Bancshares | UBFO |
| Medical Appliances | World Heart Corp | WHRT |
| Regional Banks | Western Liberty Bancorp | WLBC |
| Communication Svcs | WPCS Int'l Inc | WPCS |
| Wineries | Willamette Valley Vineyards | WVVI |
But just because a stock is cheap according to multiples doesn't mean it's a good buy. The first stock I looked at from this list confirms this.
Company: Joe's Jeans
What they do: Sell expensive jeans, retail and wholesale. In the $120+ range. They design the jeans and pay a manufacturer to sew them together.
Competitors: Many competitors in this industry. For example, 7 for all mankind.
Why can't somebody else do what they do: Joe's designs their jeans well, as evidenced by these generally good reviews:
http://www.yelp.com/biz/joes-jeans-boutique-san-francisco
http://reviews.macys.com/7129/325960/joes-jeans-honey-boot-cut-jeans-gigi-wash-reviews/reviews.htm
I believe other companies can mimic Joe's success. Joe's has experience in the jeans field, but experience can be hired. They have a brand, but that is not too well known. I think they don't have much of a sustainable competitive advantage. But trends come and go, so maybe if they become a trend, the company could take off. But a general rule is to never invest in a conjecture. I don't know the first thing about fashion trends, so I am not going to put my money on a company hoping they go in style. It has to be about the numbers, or something that plays to the expertise of the investor.
Balance sheet:
Cash and equivalents $11.5 million
Inventory $24 million
Receivables, PPE $10 million
Payables $16 million
Net Realizable Asset Value, maybe $25 million
Net Income:
Trailing 12 months, negative $2 million
Trailing 36 mos, positive
Cut to the chase
Here is the reason I don't want to invest in JOEZ. Looking at their most recent quarterly report, they lost money on their retail sales, and they have upcoming lease obligations that increase from about 3.5 million per year to 4.5 million over the next five years. They have about 4 million options to grant, 6% of the total shares outstanding, which will probably be issued if the stock price rises. Right now many options are underwater so are not counted on the balance sheet. The reason the company has high cash is because it has a factoring agreement whereby it sells its accounts receivable. Not a bad thing, but it's not like the company is a cash machine on its own. Finally, the company has a profit sharing agreement with its top board member based on a 2007 licensing deal. It gives this guy 11% of its gross margin (Revs - COGS, NOT profit margin!) from 11 million to 21 million, and about 2% of all gross margin after that. With $80 mill annual sales, it's a slam dunk that gross margin will hit these levels, so the company is taking $1.6 million out of its annual profits to pay this licensing agreement. This is already a low profit margin business, and this licensing agreement will continue through 2017. So JOEZ is not a safe enough investment for me in particular. If I were a fashion aficionado and had inside information that Joe's Jeans would be promoted at the world-class fashion show in Milan, then I'd purchase some shares. But I'm not.
Remember, this doesn't mean the stock will go down or that it is a bad investment. It just means I am not comfortable enough with the company to put my money up for it.
Friday, February 10, 2012
Corning Analysis
Here is the promised analysis of Corning (GLW). I think at $14 or so it is a good buy.
Company: Corning is a glass maker company. It makes display glass for LCD TVs, smartphones, tablets, fiber optic cables, and other random items such as some sort of car catalytic converter emissions item. Corning owns half of joint ventures with Dow (producing polysilicon glass for semiconductors and solar panels) and Samsung (display glass).
Industry: Specialty glass makers. Corning and Asahi (Japan), Nippon Electric Glass is a smaller third players. There are many fringe glass makers in different segments.
You might know it for: The video "A Day Made of Glass" on YouTube. Cool video.
Margins: Gross margin 43%, Net Profit Margin about 20%
Why can't other people do what Corning does: It requires R&D, engineering and high capital expenses to get going. It takes a while to build these big blower furnaces to make the glass, and the technology is always changing.
Market Cap: $21 billion
Current Balance Sheet:
Cash and Short Term Investments: $6 b
Inventory, LT Investments: $5.5 b
PPE and Other Tangible Assets: $12 b
-----
Total Tangible Assets: $23 b
Accounts Payable: $1 b
LT Debt, Pension, Other Liabilities: $5.5 b
-----
Total Liabilities $6.5 b
FY 2011 Net Income: $2.8 billion
Factors that affect Net Income in the future:
75% LCD
Demand for LCD TVs: Will probably remain flat
Supply chain and utilization rate for LCD glass: Should decrease demand slightly
Pricing for LCD glass: Should go down
Profits should marginally decrease
5% Dow Corning
Profits should go down as the solar craze subsides
5% Fiber Optic Cable
Profits should incrementally rise
5% Gorilla Glass (Specialty glass, tablet glass)
Profits - Faster rise. Gorilla glass 2, thinner and just as strong.
5% Environmental
Profits - Slight rise
4% Life Sciences (Lab Glass)
Profits - slight rise
1% OLED
A new type of glass for a better, more expensive flat-screen TV. Not sure how to model this. Should not affect profitability in the near future, but perhaps by 2015 this will be a big market for TVs
Amortization: CapEx has been higher recently, so Net Income will come down a bit due to amortization.
Strength of the Yen to Dollar exchange: A stronger yen helps Corning's profits. There was a strong yen in 2009-2011 which added a significant amount to the bottom line. The future is uncertain.
Future income will probably be lower than $2.8 billion in 2011. There are some pricing pressures that will cut into margins. Revenue will probably improve slightly. A floor for income is about $1.5 billion. If the Gorilla Glass or other segments can outperform, you could see it go up from there.
Converting Net Income to Cash Flow:
Capital Expenditures: These were up around $2 billion in 2011. Higher than in the past, so you are going to see a higher amortization in the future. 2012 is planned just below that. It would be nice to see Corning reduce this number in 2013.
Converting Cash Flow to Share Value:
Shares outstanding : Pretty constant at 1.56-1.58 billion over the last two years. Corning just implemented a buyback program which should reduce shares just below 1.5 billion outstanding. Corning also pays regular dividends to shareholders. No planned spinoffs and Corning is not a rumored acquisition target.
Bottom Line:
Paying about $20 billion for maybe $8 billion in realizable asset value plus $1.5 billion per year. Good deal in my opinion.
Company: Corning is a glass maker company. It makes display glass for LCD TVs, smartphones, tablets, fiber optic cables, and other random items such as some sort of car catalytic converter emissions item. Corning owns half of joint ventures with Dow (producing polysilicon glass for semiconductors and solar panels) and Samsung (display glass).
Industry: Specialty glass makers. Corning and Asahi (Japan), Nippon Electric Glass is a smaller third players. There are many fringe glass makers in different segments.
You might know it for: The video "A Day Made of Glass" on YouTube. Cool video.
Margins: Gross margin 43%, Net Profit Margin about 20%
Why can't other people do what Corning does: It requires R&D, engineering and high capital expenses to get going. It takes a while to build these big blower furnaces to make the glass, and the technology is always changing.
Market Cap: $21 billion
Current Balance Sheet:
Cash and Short Term Investments: $6 b
Inventory, LT Investments: $5.5 b
PPE and Other Tangible Assets: $12 b
-----
Total Tangible Assets: $23 b
Accounts Payable: $1 b
LT Debt, Pension, Other Liabilities: $5.5 b
-----
Total Liabilities $6.5 b
FY 2011 Net Income: $2.8 billion
Factors that affect Net Income in the future:
75% LCD
Demand for LCD TVs: Will probably remain flat
Supply chain and utilization rate for LCD glass: Should decrease demand slightly
Pricing for LCD glass: Should go down
Profits should marginally decrease
5% Dow Corning
Profits should go down as the solar craze subsides
5% Fiber Optic Cable
Profits should incrementally rise
5% Gorilla Glass (Specialty glass, tablet glass)
Profits - Faster rise. Gorilla glass 2, thinner and just as strong.
5% Environmental
Profits - Slight rise
4% Life Sciences (Lab Glass)
Profits - slight rise
1% OLED
A new type of glass for a better, more expensive flat-screen TV. Not sure how to model this. Should not affect profitability in the near future, but perhaps by 2015 this will be a big market for TVs
Amortization: CapEx has been higher recently, so Net Income will come down a bit due to amortization.
Strength of the Yen to Dollar exchange: A stronger yen helps Corning's profits. There was a strong yen in 2009-2011 which added a significant amount to the bottom line. The future is uncertain.
Future income will probably be lower than $2.8 billion in 2011. There are some pricing pressures that will cut into margins. Revenue will probably improve slightly. A floor for income is about $1.5 billion. If the Gorilla Glass or other segments can outperform, you could see it go up from there.
Converting Net Income to Cash Flow:
Capital Expenditures: These were up around $2 billion in 2011. Higher than in the past, so you are going to see a higher amortization in the future. 2012 is planned just below that. It would be nice to see Corning reduce this number in 2013.
Converting Cash Flow to Share Value:
Shares outstanding : Pretty constant at 1.56-1.58 billion over the last two years. Corning just implemented a buyback program which should reduce shares just below 1.5 billion outstanding. Corning also pays regular dividends to shareholders. No planned spinoffs and Corning is not a rumored acquisition target.
Bottom Line:
Paying about $20 billion for maybe $8 billion in realizable asset value plus $1.5 billion per year. Good deal in my opinion.
Wednesday, February 1, 2012
Missed opportunity
A month ago I mentioned Corinthian Colleges (COCO) in a post. I sort of tuned them out because I don't really think they add value to society. Their business model is a hustle (signing people up for loans to pay for expensive education that is not that valuable). But in the investing world, a dollar from a hustle is worth just as much as a dollar from a brilliant invention. Buying stocks, you are simply trading money today for a set of assets plus a stream of cash flows in the future.
A company with a decent balance sheet, trading at 1/6 of annual revenues profitable two out of the last three years, may not be a bad bet. The two things to watch out for would be an industry change, such as a change in the education loan laws, or fraudulent accounting practices.
Anyway, COCO is up 30% today on good earnings. So the lesson is to keep an open mind even if you find a stock distasteful.
A company with a decent balance sheet, trading at 1/6 of annual revenues profitable two out of the last three years, may not be a bad bet. The two things to watch out for would be an industry change, such as a change in the education loan laws, or fraudulent accounting practices.
Anyway, COCO is up 30% today on good earnings. So the lesson is to keep an open mind even if you find a stock distasteful.
Saturday, January 28, 2012
Stocks Nov 1 to today
Here is a quarterly review of the stocks I owned from Nov 1 (start of Q3 earnings blitz) through today:
GRMN $34.19 to $41.36 up 20%. Reasons for stock price change: Very strong earnings. Analysts predicting growth in all of the company’s segments.
AFAM $15.96 to $18.70 up 18%. Reasons: Company did not report a charge-off on earnings as competitors did. Broader industry confidence.
RIMM $19.30 to $16.80 down 13%. Reasons: weaker earnings than expected, lack of confidence in company’s positioning and future strategy.
RWC $0.99 to $1.25 up 25%. Reasons: Strong earnings, higher sales and profits.
BAC $6.40 to $7.29 up 14%. Reasons: Stronger earnings, more confidence in company’s financial position with Basel III approaching, less fear of litigation risk from credit crisis and need to raise capital
LUV $8.46 to $9.62 up 13%. Reasons: Strong earnings, better than expected industry results, increased confidence in the airline industry and the economy
BKS $11.83 to $11.95 up 1%. Reasons: Shares skyrocketed on new Nook and e-Reader business when the Kobo business sold for $315 million. Then came back down on analyst rumors that the Nook business is unprofitable and losing cash.
NYT $7.16 to $7.90 up 10%. Reasons: Confidence in the web subscription plan, Buffett bought a newspaper so the industry confidence improved.
TFM $39.07 to $44.74 up 15%. Reasons: Stronger than expected earnings.
AMED $10.06 to 10.04 flat. Reasons: Weak earnings. Downgrade by analyst, broader market increase canceled each other out.
The weighted average return was about 13%. Meanwhile, the market was up about 8%. I honestly believe a lot of that was luck. I am happy to beat the market at all at this point, and I imagine that future returns will be smaller, especially if the market is down.
I’m timing this now because it’s the last weekend lull before EOY earnings start to hit in early February, and I’d like to read some 10Ks when that happens. The timing is arbitrary, and in isolation this sample size is too small to say anything definitive. For example, if I had looked at this a few weeks ago, BKS would have been the best trade. And it still may be. But now it appears close to flat. A few earnings cycles will give a better picture of performance.
Now, here is my investment thesis, or reasoning behind buying these stocks. Note that the theses are fairly simple. No complex formulas.
GRMN: Market was down on company because of low Auto profits, but other segments (Marine, Aviation, Outdoor, etc.) made up the majority of the company’s income and were growing. Cheap price considering company has a huge cash position and excellent balance sheet.
RIMM: Analysts are overly concerned about U.S. results and not focused on the cash flow, balance sheet, and international. Company is well positioned as a software and hardware maker and should maintain a positive profit margin. Company has plenty of time to innovate with no large upcoming debt obligations. Established niche with secure corporate sector.
AFAM: Strong balance sheet and earnings, the least debt among all of its competitors. Trading near book value with low P/E.
RWC: Low market cap, good product at a good price. Potential for rapid growth if company can effectively market its product. Potential takeover candidate at present value. Greater reward than risk in my opinion.
BAC: Was able to purchase this stock at a better price than Buffett’s $7 options. Company was cheap on speculation about litigation risk.
LUV: Good balance sheet, fleet of planes is not too old. Profitable company trading at a cheap valuation. Like their differentiation and marketing campaign with the “no baggage fees,” no hassle role they are taking.
BKS: Was able to purchase this stock at a much better price than John Malone’s $17 options. Takeover candidate because of the Nook.
NYT: Established itself as the market leader in news journalism. I see it holding its position because of loyal readers, and internet subscription model allows it to collect revenues from people all over the world. Low P/E and valuation. Able to get the stock at the same price as Carlos Slim.
TFM: Good balance sheet, good niche with high-end groceries. Friend recommended it based on holiday sales potential.
AMED: Low valuation based on previous years’ earnings. The in-home care segment is cheaper than hospital care and I believe it has a place as medicare and senior care evolved.
Wednesday, January 25, 2012
Real Estate Investment
Real estate investment is not so different from investing in stocks.
With both, you are trading cash for an asset value (comp amount or balance sheet) plus a set of future cash flows (rental value or income)
You have to decide what the cash flows are, how certain they are, discount them based on certainty, and add an asset value.
I may get more into this later.
With both, you are trading cash for an asset value (comp amount or balance sheet) plus a set of future cash flows (rental value or income)
You have to decide what the cash flows are, how certain they are, discount them based on certainty, and add an asset value.
I may get more into this later.
Tuesday, January 24, 2012
Riding sentiment: Timing
Here is a neat study. So I was thinking about timing of trades, and I had a hypothesis: the best time to buy is just after good earnings. I call it the "No Bad News" theory: over the next three months, the largest and most recent piece of news for a company was its earnings success. Therefore, because humans are subject to recency bias, the stock should rise at a greater rate than the market.
To study this hypothesis, I looked at the first 40 companies alphabetically that beat earnings in quarter 3 2011 by at least 10%. I used this list:
(then replace -part-2 with -part-3, -part-4, etc. to see the rest of the list)
To study this hypothesis, I looked at the first 40 companies alphabetically that beat earnings in quarter 3 2011 by at least 10%. I used this list:
Here are the results:
Companies that beat earnings estimates in Q3 '11 by >10%, stock prices from the close of the day after earnings announcement to present:
AEL Nov 3 $11.47 to $11.16 down 3%
UHAL Oct 28 $79.10 to $95.48 up 20%
ALVR Nov 2 $1.04 to $1.15 up 10%
ANIK Nov 3, 2011 $7.27 to $9.43 up 30%
AOL Nov 2 $15.42 to $15.60 up 1%
ARC Nov 2 $4.59 to $5.46 up 20%
AREX Nov 2 $27.51 to $34.32 up 25%
ATNI Nov 3 $41.97 to $36.49 down 15%
CACI Nov 2 $58.04 to $57.66 down 1%
CCRN Nov 2 $5.30 to $6.00 up 12%
CGX Nov 2 $50.87 to $48.06 down 5%
CLH Nov 2 $57.99 to $63.49 up 7%
CLMT Nov 2 $18.65 to $21.62 up 15%
CLWR Nov 2 $1.75 to $1.81 up 4%
CLX $63.97 to $68.63 up 7%123
CHTP Nov 2 $4.74 to $4.94 up 4%
CNL Nov 3 $36.85 to $37.12 up 1%
CNP Nov 2 $20.30 to $18.81 down 7%
COHR Nov 2 $53.86 to $57.68 up 7%
CPE Nov 3 $5.67 to $5.62 down 1%
CSII Nov 2 $8.53 to $9.65 up 14%
CSU Nov 3 $7.74 to $7.89 up 2%
CUZ Nov 3 $6.67 to $7.07 up 7%
DRC Nov 3 $51.64 to $53.29 up 3%
ECTY Nov 2 $1.87 to $1.14 down 40%
EDGW Nov 2 $2.89 to $3.26 up 15%
EIG Nov 2 $17.43 to $18.57 up 7%
ELLI Nov 2 $5.46 to $5.63 up 3%
EXTR Nov 2 $3.10 to $3.08 down 1%
FARO Nov 2 $44.63 to $53.83 up 20%
FCN Nov 2 $42.07 to $42.04 flat
FIO Nov 2 $35.29 to $29.29 down 18%
GAIN Nov 3 $7.48 to $7.95 up 6%
GGC Nov 2 $18.98 to $34.97 up 84%
GRMN Nov 2 $35.88 to $42.00 up 18%
GVA Nov 2 $26.56 to $27.33 up 3%
HBI Nov 2 $27.30 to $24.89 down 9%
HSNI Nov 2 $37.83 to $36.68 down 4%
HGG Nov 2 $14.08 to $11.24 down 21%
WOLF Nov 2 $2.62 to $3.18 up 22%
TOTAL
UP: 27
DOWN: 12
FLAT: 1
AVERAGE: up 6%
Meanwhile, over that same period the Dow has risen 5%, the S&P 4%, and the Nasdaq 3%.
Meanwhile, over that same period the Dow has risen 5%, the S&P 4%, and the Nasdaq 3%.
So the results are moderately positive. More data would be helpful after the 2011 Q4 earnings sprint leading up to 2012 Q1.
I got the idea from Michael "my goodness look at those phenomenal results" Burry, who posted in his early days on Silicon Investor "sell on new lows." I thought, strange, because that concept is very anti-Buffett. I twisted it a little bit into this theory here.
The bottom line: Your short-term profitability might increase using this method. Long-term, I am not sure. That requires another study for another day.
Sunday, January 22, 2012
Why shorting stocks is more dangerous than going long
-Shorting requires a cash margin so that your trade is not called by the broker
-If the stock goes up, your margin must increase
-There is no check on an overvalued stock. You just have to wait. Only negative earnings or a change in investor sentiment will bring the stock down. Meanwhile, a company that is undervalued can sell itself, spin off a portion of the company, repurchase shares, or issue dividends to keep its price in line.
You can definitely make money shorting an expensive stock. But it is more risky than going long a cheap one in my opinion.
-If the stock goes up, your margin must increase
-There is no check on an overvalued stock. You just have to wait. Only negative earnings or a change in investor sentiment will bring the stock down. Meanwhile, a company that is undervalued can sell itself, spin off a portion of the company, repurchase shares, or issue dividends to keep its price in line.
You can definitely make money shorting an expensive stock. But it is more risky than going long a cheap one in my opinion.
Corning (GLW)
This is looking like a good pickup to me. A number of things are encouraging about this stock, and I hope I will have time to detail them all in a post. Possibly next weekend.
Here's one nugget, from the Q3 2011 Conference Call:
"Lastly, we continue to feel very confident about our long-term business prospects and our ability to generate cash on a consistent basis. We recently took action consistent with this long-term outlook. We announced the $1.5 billion stock buyback program and a 50% increase on our quarterly dividend. Increased dividends moves our yield up to approximately 2.5% based on our current stock price. Regarding the share buyback, our decision was based on the opinion that the company's current stock price represented a significant discount to the real value of Corning's businesses. We understand the short-term concerns relative to recent macro events. But our board's recent action reflects our belief that long-term value of our businesses is substantially greater than our current share price. We expect to be active in the market, repurchasing our stock very soon."
Share repurchases and dividends are great, especially when you have excess cash and your stock is trading at below 10 P/E and you have no enormous capital expenditures planned. The key is the bolded statement above. I think there should be almost a law that says no company can repurchase its shares unless it has a huge amount of cash and the P/E is below 20 and it is not going to need to raise money soon. Off the top of my head, RIMM, NFLX, and GRMN have all repurchased shares at inopportune times over the last two years. I think this is the perfect time for GLW to repurchase.
Here's one nugget, from the Q3 2011 Conference Call:
"Lastly, we continue to feel very confident about our long-term business prospects and our ability to generate cash on a consistent basis. We recently took action consistent with this long-term outlook. We announced the $1.5 billion stock buyback program and a 50% increase on our quarterly dividend. Increased dividends moves our yield up to approximately 2.5% based on our current stock price. Regarding the share buyback, our decision was based on the opinion that the company's current stock price represented a significant discount to the real value of Corning's businesses. We understand the short-term concerns relative to recent macro events. But our board's recent action reflects our belief that long-term value of our businesses is substantially greater than our current share price. We expect to be active in the market, repurchasing our stock very soon."
Share repurchases and dividends are great, especially when you have excess cash and your stock is trading at below 10 P/E and you have no enormous capital expenditures planned. The key is the bolded statement above. I think there should be almost a law that says no company can repurchase its shares unless it has a huge amount of cash and the P/E is below 20 and it is not going to need to raise money soon. Off the top of my head, RIMM, NFLX, and GRMN have all repurchased shares at inopportune times over the last two years. I think this is the perfect time for GLW to repurchase.
Friday, January 20, 2012
So much to read, and so little time
The Intelligent Investor
Common Stocks and Uncommon Profits
Buffettology
Why Stocks go Up and Down
Investing in Real Estate
You Can Be a Stock Market Genius
Against the Gods
Shakespeare
Yikes. One at a time soldier.
Common Stocks and Uncommon Profits
Buffettology
Why Stocks go Up and Down
Investing in Real Estate
You Can Be a Stock Market Genius
Against the Gods
Shakespeare
Yikes. One at a time soldier.
Why stocks go up and down
Stock trades are arbitrary. The price can fluctuate to whatever the market is willing to pay - with no check.
Not quite true. There are some checks, especially if the price gets too low. These keep the prices level in the long term:
1. Mergers and Acquisitions, especially for cash
2. Dividends
3. Share repurchases
4. Spinoffs
5. Issuing new shares drags the price down.
There could be more, but that's the gist of it. If you can predict these events before they happen, especially for a cheap stock, you're in business.
Often a company's assets, cash flow, and earnings are predictors of these events. If the price gets below a certain level of sustainable cash flow and earnings plus liquid assets, there will be share repurchases, spinoffs, or M&A.
Not quite true. There are some checks, especially if the price gets too low. These keep the prices level in the long term:
1. Mergers and Acquisitions, especially for cash
2. Dividends
3. Share repurchases
4. Spinoffs
5. Issuing new shares drags the price down.
There could be more, but that's the gist of it. If you can predict these events before they happen, especially for a cheap stock, you're in business.
Often a company's assets, cash flow, and earnings are predictors of these events. If the price gets below a certain level of sustainable cash flow and earnings plus liquid assets, there will be share repurchases, spinoffs, or M&A.
Whitney Tilson: What are you thinking? My Netflix analysis
Whitney Tilson's Netflix story is an interesting one. He wrote an excellent article about shorting Netflix when it was at $170.
http://seekingalpha.com/article/242320-whitney-tilson-why-we-re-short-netflix
He covered the short at about $200 after being persuaded by Reed Hastings (NFLX CEO) to do it.
The stock went to $300 then crashed. Damn. Heartbreaking.
Now it gets interesting:
Tilson then bought the stock at $85 or so. Ok. His quote that struck me was "I hope it gets cheaper so we can add to [our position]."
http://dealbreaker.com/2011/10/whitney-tilson-t2-partners-nailed-its-netflix-short-except-for-the-fact-that-it-didnt/
Wait - what?! Why would you ever want a stock you buy to go down? Are you saying that in the spectrum of thousands of publicly traded U.S. companies - and a larger plethora of international ones - you can't find a single investment opportunity that you like, so you want your current positions to go down??? That makes no sense. Diversify, Tilson. If a stock goes up, sell it and buy another cheap one. Wait, it gets worse -
So it's January and the stock is trading in the $100 range now, and Tilson has made about 20% on his long position. In a recent interview, he said that "he is in Netflix for the long haul." Ok. So what is your price target?
Here is how investing works in my mind. You don't have to nail your analysis. You don't have to be a brilliant mathematician. All you have to do is find stocks that are so cheap (or short ones that are so expensive) that your probability of profit is high. In other words, you find a stock that you think is worth $180 and you buy it at $100, you don't buy a stock you think is worth $120 for $100 because there is not enough margin for error - you might be wrong. Well let me clarify that. If you KNOW it's worth $120 - say, the present value of the assets is undoubtedly worth $120, then go for it. Because that's certain. But a company like Netflix, a growth play with tons of uncertainty, you have to be sure you are getting a good deal before you jump in. You need more margin for error, because there is greater probability that your analysis is wrong. If Tilson was short $170 with a brilliant analysis, and now he's long $100 for the haul, my question is, what does he think the stock is worth? $135? I mean there is just not enough margin for error there.
So anyway, maybe he's got a good play now, but his whole reasoning and trade history is dubious.
Now for my analysis:
If I could toot my horn for a minute, I did get a 25% profit in January, buying at $76 and selling at $94 a week later. Tax loss baby! Sorry but I just feel good about that trade. I won't brag about trades too much more. I lose on a lot of trades, too.
I have no idea what Netflix is worth long-term, but here is Porter's five forces analysis that is more bearish than bullish.
Supplier power: High. Movie studios don't like Netflix. They charge a lot for movies. That's why the 'Flix is trying to shift to TV shows. The TV shows studios have lower bargaining power because there are many similar compelling substitutes to each show. Internet companies are getting higher power.
Buyer power: High. Low switching costs. iTunes. Amazon. LoveFilm. Hulu.
Threat of substitutes: High. Youtube. Illegal file sharing sites. Watch TV online sites. Cable. Etc.
Threat of new entrants: High. It's easy to get in this business.
Rivalry: High. Price wars. High marketing costs.
Netflix's lone differentiator is network effects - so many people subscribe to it, that TV shows will want to offer lower prices to reach all of those people. Is that enough to overcome the other forces against the company?
Netflix's long-term profit margin will be low in my opinion. Like I mentioned before, it was trading pretty cheap compared to its revenues, especially at around $70. If you want to buy it, that's your case right there. But I am not going to buy any shares at $100 because it's just too risky in my opinion. But note that I am very risk averse, because it's better to pass up a good opportunity than to invest in a bad one.
http://seekingalpha.com/article/242320-whitney-tilson-why-we-re-short-netflix
He covered the short at about $200 after being persuaded by Reed Hastings (NFLX CEO) to do it.
The stock went to $300 then crashed. Damn. Heartbreaking.
Now it gets interesting:
Tilson then bought the stock at $85 or so. Ok. His quote that struck me was "I hope it gets cheaper so we can add to [our position]."
http://dealbreaker.com/2011/10/whitney-tilson-t2-partners-nailed-its-netflix-short-except-for-the-fact-that-it-didnt/
Wait - what?! Why would you ever want a stock you buy to go down? Are you saying that in the spectrum of thousands of publicly traded U.S. companies - and a larger plethora of international ones - you can't find a single investment opportunity that you like, so you want your current positions to go down??? That makes no sense. Diversify, Tilson. If a stock goes up, sell it and buy another cheap one. Wait, it gets worse -
So it's January and the stock is trading in the $100 range now, and Tilson has made about 20% on his long position. In a recent interview, he said that "he is in Netflix for the long haul." Ok. So what is your price target?
Here is how investing works in my mind. You don't have to nail your analysis. You don't have to be a brilliant mathematician. All you have to do is find stocks that are so cheap (or short ones that are so expensive) that your probability of profit is high. In other words, you find a stock that you think is worth $180 and you buy it at $100, you don't buy a stock you think is worth $120 for $100 because there is not enough margin for error - you might be wrong. Well let me clarify that. If you KNOW it's worth $120 - say, the present value of the assets is undoubtedly worth $120, then go for it. Because that's certain. But a company like Netflix, a growth play with tons of uncertainty, you have to be sure you are getting a good deal before you jump in. You need more margin for error, because there is greater probability that your analysis is wrong. If Tilson was short $170 with a brilliant analysis, and now he's long $100 for the haul, my question is, what does he think the stock is worth? $135? I mean there is just not enough margin for error there.
So anyway, maybe he's got a good play now, but his whole reasoning and trade history is dubious.
Now for my analysis:
If I could toot my horn for a minute, I did get a 25% profit in January, buying at $76 and selling at $94 a week later. Tax loss baby! Sorry but I just feel good about that trade. I won't brag about trades too much more. I lose on a lot of trades, too.
I have no idea what Netflix is worth long-term, but here is Porter's five forces analysis that is more bearish than bullish.
Supplier power: High. Movie studios don't like Netflix. They charge a lot for movies. That's why the 'Flix is trying to shift to TV shows. The TV shows studios have lower bargaining power because there are many similar compelling substitutes to each show. Internet companies are getting higher power.
Buyer power: High. Low switching costs. iTunes. Amazon. LoveFilm. Hulu.
Threat of substitutes: High. Youtube. Illegal file sharing sites. Watch TV online sites. Cable. Etc.
Threat of new entrants: High. It's easy to get in this business.
Rivalry: High. Price wars. High marketing costs.
Netflix's lone differentiator is network effects - so many people subscribe to it, that TV shows will want to offer lower prices to reach all of those people. Is that enough to overcome the other forces against the company?
Netflix's long-term profit margin will be low in my opinion. Like I mentioned before, it was trading pretty cheap compared to its revenues, especially at around $70. If you want to buy it, that's your case right there. But I am not going to buy any shares at $100 because it's just too risky in my opinion. But note that I am very risk averse, because it's better to pass up a good opportunity than to invest in a bad one.
Friday, January 13, 2012
Beware Overuse of Capitalized Expenses
One more note for today -
Examining Toyota's annual report, this crossed my mind. Sometimes companies capitalize expenses and report high net income although cash flow was negative. The trick is that they have to amortize these expenses, which will show up as negative net income whenever the amortization occurs. So you can see companies with high current capitalized expenses, and predict a negative impact on net income in the future.
For example, an airline: If it buys 100 airplanes, it will capitalize that expense and build its assets rather than reduce net income. But then it has to amortize the value of those planes. So you will probably see a reduction in net income in the future. A good trick might be to look at the average age of a fleet of planes before you invest in an airline company. Other industries face this risk as well if they have high capital requirements.
Examining Toyota's annual report, this crossed my mind. Sometimes companies capitalize expenses and report high net income although cash flow was negative. The trick is that they have to amortize these expenses, which will show up as negative net income whenever the amortization occurs. So you can see companies with high current capitalized expenses, and predict a negative impact on net income in the future.
For example, an airline: If it buys 100 airplanes, it will capitalize that expense and build its assets rather than reduce net income. But then it has to amortize the value of those planes. So you will probably see a reduction in net income in the future. A good trick might be to look at the average age of a fleet of planes before you invest in an airline company. Other industries face this risk as well if they have high capital requirements.
Update
Picked up some Toyota today.
Those tax loss stocks have continued to outperform the market.
Will get to analysis of Netflix soon.
Stock to watch - WebMD (WBMD). Why is Icahn so bullish? Not sure. Keep an eye on it.
Those tax loss stocks have continued to outperform the market.
Will get to analysis of Netflix soon.
Stock to watch - WebMD (WBMD). Why is Icahn so bullish? Not sure. Keep an eye on it.
Monday, January 9, 2012
Checking on tax loss stocks
Here are the tax loss sellers from the article:
So on the whole you are looking at about 4% up on average. Meanwhile, the market was up 1.5%. So these stocks have beaten the market, assuming you have enough capital to book all of them with below 1% transaction costs on each end. Those trading fees will get you.
The stocks' Betas are important to look at, because if the market goes up, a high beta stock may track the market. So if you see a rise in high-beta stocks while the market is rising, maybe it was only their volatility and correlation with the market that caused them to rise. It's very difficult to measure.
The problem with just plugging a formula and chugging with the stocks you get is you could wind up with a bag of wind. I believe one of the stocks on the list, Zhongpin, is in a basket of reverse merger ADRs that have been targeted by short selling firms such as Muddy Waters with questions of fraud. COCO has been the subject of criticism because of its reliance on student loans for income. Many of those are pharma companies which are dependent on FDA and testing results and have huge discount rates. But then HOGS was the biggest winner of the group, so what do I know? But I'm not going to buy that guy at any price. Just because you made money doesn't make it a good investment. Sort of.
Netflix has jumped tremendously, I believe in part because of the tax loss investment. It took such a huge hit in 2011, and I think you saw some tax loss selling at the end of the year. Now it is rising again. But I am not sure about the long-term prospects, to be discussed in the next post. It could be successful, but there is risk, especially when it has to compete on price as it is in the U.K. with Amazon.
—AMN Healthcare Services AHS down 10%
—Antares Pharma AIS down 2.5%
—Bio-Reference Labs BRLI up 3%
—Connecticut Wtr Svc CTWS down 2.5%
—Corinthian Colleges COCO up 8%
—Digital Generation DGIT up 5%
—8X8 Inc EGHT down 1%
—Geoeye GEOY flat
—Superior Inds Int’l SUP up 4%
—Travelzoo TZOO up 10%
—Uranium Energy UEC down 1%
—Zhongpin HOGS up 25%So on the whole you are looking at about 4% up on average. Meanwhile, the market was up 1.5%. So these stocks have beaten the market, assuming you have enough capital to book all of them with below 1% transaction costs on each end. Those trading fees will get you.
The stocks' Betas are important to look at, because if the market goes up, a high beta stock may track the market. So if you see a rise in high-beta stocks while the market is rising, maybe it was only their volatility and correlation with the market that caused them to rise. It's very difficult to measure.
The problem with just plugging a formula and chugging with the stocks you get is you could wind up with a bag of wind. I believe one of the stocks on the list, Zhongpin, is in a basket of reverse merger ADRs that have been targeted by short selling firms such as Muddy Waters with questions of fraud. COCO has been the subject of criticism because of its reliance on student loans for income. Many of those are pharma companies which are dependent on FDA and testing results and have huge discount rates. But then HOGS was the biggest winner of the group, so what do I know? But I'm not going to buy that guy at any price. Just because you made money doesn't make it a good investment. Sort of.
Netflix has jumped tremendously, I believe in part because of the tax loss investment. It took such a huge hit in 2011, and I think you saw some tax loss selling at the end of the year. Now it is rising again. But I am not sure about the long-term prospects, to be discussed in the next post. It could be successful, but there is risk, especially when it has to compete on price as it is in the U.K. with Amazon.
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