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.

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.

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:

http://wallstwatchdog.com/blog/commentary-analysis/companies-that-beat-earnings-expectations-in-q3-2011.html

http://wallstwatchdog.com/blog/commentary-analysis/companies-that-beat-earnings-expectations-in-q3-2011-part-2.html

  (then replace -part-2 with -part-3, -part-4, etc. to see the rest of the 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%.

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.

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.

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.

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.

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.

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.

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.

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.

Checking on tax loss stocks

Here are the tax loss sellers from the article:

—Accelrys ACCL up 1%

—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.