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.