We have a significant perspective issue that over took the equities markets in 1995. And we fear this perspective will haunt the markets for many years to come.
This was the dawning of the the internet bubble, and Netscape was the band leader. It was followed by companies like EBAY, Amazon, and AOL. These Companies were treated by IPO bankers as high risk propositions. And their IPO process and structure were all very standard for unprofitable, modest revenue concerns that were unable to raise the capital their business models needed to become profitable from the private markets. The IPO bankers offered a small amount of shares, typically between 5 and 7 million shares, to the public representing 10 - 20% of the company's total shares outstanding. The thinking was fairly sound at the time, no one knew when or in most cases how these companies would become profitable. All, including the companies, believed that more money would need to be raised in future secondary rounds from the public. So a modest IPO issue of a modest amount of Company equity, leaving more equity on the table for future public offerings was the preferred route. This was a sound model in an uncertain era not yet realizing it was the leading indicator of an explosion of new money, new share structures, new shareholder / management relationships.
The problem began when the demand for Netscape shares exceeded the availability of these shares by multiples. Some bankers believed that for each share offered in the initial offering, 20x that amount was requested by the investment public. Thus created an IPO issuance that doubled from $14 to $28 per share initial pricing and soon, once available for public buying, became $75.00 a share. This for a company who reported revenues of less than $1.0 million US in the 12 months prior to its IPO and had spent nearly all its money invested to date, accumulating losses of nearly $7.0 million dollars.
The question is why did the stock trade to $75.00 within a few days of its IPO given the historic financial performance of the company. The real reason - an imbalance of shares offered to satisfy the public demand. But Wall Street can't tell you that. It would be admitting to a mistake in the greatest IPO in more than 20 years. Instead, Wall Street set about using Netscape as an example of its forward looking genius. Its analysts spoke of new paradigms, future valuation models that proved the stock was under valued. And raving about a market capitalization value which exceeded 6.0 billion dollars based upon expected future earnings.
The reality was that Netscape's market value on a per share basis was more than 80% based upon shares that would never trade or be available to the public, held by insiders who were restricted by both the IPO bankers and the SEC's regulations from selling their shares. Had those insider shares been available for sale, it is highly unlikely that the shares of Netscape would have reached even $30.00.
But what was created was a new model that IPO bankers replicated for years during the tech bubble. By creating supply / demand imbalances in the public markets for interesting tech companies, investors were forced to go to the public markets to acquire shares, rather than the company directly, and share prices for IPO's soared. Now analysts were faced with the task of justifying the public prices and market values of these capitalization challenged firms. They wheeled out Excel spread sheets and began creating new rationale for value. And while this occurred these same valuation applications (Projected Revenue Multiples, Projected future customers, Discounted Cash Flow with Terminal Earnings Multiples) were being applied to the tried and true cash flowing companies of the S & P 100 index whose values soared with the markets.
It became normal to see a company trading at 25.0x earnings. Or to see a company trading at 3.0x projected revenues. And now today we are left with this legacy. Because who would pay 25.0x (or 25 years times) a company's earnings in order to own a company? The answer unfortunately is today's fund managers. They are caught in a cycle of over valuation that will take many many years to get to equilibrium, and until then, volatility in the markets of the last six months won't be an aberration, it will be the norm.
GE - $11.35, maintain stop loss at $9.90
Dell - 10.37, maintain stop loss at $8.50
Build Value Every Day
Brad van Siclen
Tuesday, April 21, 2009
Thursday, April 16, 2009
Dow Jones No Longer A Good Thing - 4 / 17 / 2009
I have not written in 3 days for the following reason - nothing has happened in these markets that is surprising to traders, to you, or to me. Ask yourself why the market has traded sideways (compared to recent weeks) amid earnings season reports. Traders have learned to limit their own exposure in this market, not get caught by intraday market reversals, and now we have a market that reacts independently of Large Cap and Dow Component earnings surprises. It continues to amaze me that research groups find any value in paying Banking sector research analysts, and frankly that they continue to appear in the media restating what every other bank analyst has said and that is considered at all valuable.
What we do have is a problem. Dow Jones Components will trade in relative collusion so long as traders continue to enjoy the liquidity and expected volatility the index DIA offers. The only breakouts we are likely to see in any of the shares of these companies in the index will be to the down side as short sellers pile in against earnings misses. But unless there is a bankruptcy fear, funds will use these short term down swings to cost average their existing positions and modest price swings will occur. Here's the problem: membership in the Dow Jones index will reduce a company's upside share price potential. It would seem that Dow Jones Index inclusion, in anything other than a bull market, is detrimental to shareholders. Look what happened to the mighty Intel and Microsoft (MSFT) when they became Dow Components. Their earnings increased dramatically, but their multiple to earnings decreased dramatically reflective of the super stable growth of its Dow Component co-members. MSFT was so beaten down, even though their growth opportunity remained dramatic, that they announced a dividend. Forced by the Dow Jones investors to behave like Du Pont.
Meanwhile I have already heard the talking heads justifying the lack of market upswing in individual stocks that have dramatically beaten earnings expectations, by stating "there was no surprise in results". Have traders and fund managers already decided to ignore research analysts in favor of their own analysis? No. Unfortunately we have proven our Dow Theory for this period of market history. Dow Index day traders are in control of the value of our economy. And their sentiment is "How do I make money today with the least amount of risk". I don't see this changing for many months to come. Stick with components that have been unfairly beaten down on a P/E relative basis, expect 30% appreciation in those components over the next 12 months, and be happy with those returns. Momentum, bad, Value, good.
Build Value Every Day
Brad van Siclen
What we do have is a problem. Dow Jones Components will trade in relative collusion so long as traders continue to enjoy the liquidity and expected volatility the index DIA offers. The only breakouts we are likely to see in any of the shares of these companies in the index will be to the down side as short sellers pile in against earnings misses. But unless there is a bankruptcy fear, funds will use these short term down swings to cost average their existing positions and modest price swings will occur. Here's the problem: membership in the Dow Jones index will reduce a company's upside share price potential. It would seem that Dow Jones Index inclusion, in anything other than a bull market, is detrimental to shareholders. Look what happened to the mighty Intel and Microsoft (MSFT) when they became Dow Components. Their earnings increased dramatically, but their multiple to earnings decreased dramatically reflective of the super stable growth of its Dow Component co-members. MSFT was so beaten down, even though their growth opportunity remained dramatic, that they announced a dividend. Forced by the Dow Jones investors to behave like Du Pont.
Meanwhile I have already heard the talking heads justifying the lack of market upswing in individual stocks that have dramatically beaten earnings expectations, by stating "there was no surprise in results". Have traders and fund managers already decided to ignore research analysts in favor of their own analysis? No. Unfortunately we have proven our Dow Theory for this period of market history. Dow Index day traders are in control of the value of our economy. And their sentiment is "How do I make money today with the least amount of risk". I don't see this changing for many months to come. Stick with components that have been unfairly beaten down on a P/E relative basis, expect 30% appreciation in those components over the next 12 months, and be happy with those returns. Momentum, bad, Value, good.
Build Value Every Day
Brad van Siclen
Monday, April 13, 2009
More Banking Upside Surprises - Analysts Caught Napping Again - 4 / 14 / 2009
First: Followers should move stop loss on GE from $7.95 to $9.60, maintaining the 20%down side protection. GE closed yesterday at $12.20. Dell at $10.40 needs no chnages.
Talk of the day surrounds Goldman Sachs and the PPI. Goldman has clearly hired excellent PR representatives to manage its new found national recognition as being the smartest, best commercial and investment bank the world has ever seen. Goldman now calls its need to pay back TARP funds a "Duty". Goldman like other stable commercial banks has enjoyed the same no-cost-of-capital advantages that Wells Fargo recently dined on. It must be great to have fired ten's of thousand's of employees, reducing the largest portion of its variable costs, and then have the Government hand you essentially no cost money from which to access the capital markets on a proprietary trading basis. (If you note only a hint of sarcasm, you are not reading my posts daily.) This is akin to a farmer not having to pay for seeds, fertilizer or feed, and then selling everything for pure profit minus the value of his own sweat labor - all in 90 days..amazing.
Does anyone know where Goldman's profits came from this quarter? Trading profits. During the first quarter, markets were up 25% across the board. Goldman took its share of the TARP money and money at 0.25% interest on federal interbank loans and invested it in the stock markets. Bang, $1.9 Billion in profits. Profits that will ultimately go to its remaining executives pockets in salary and bonuses. They are raising funds now by selling equity to repay the TARP loans. Then they ride their commercial bank designation and low, low cost of capital all the way to the Bank. Isn't US Government Led Capitalism great?
At least Wells Fargo made their surprise profits from fees generated in refinancings of business and home loans, and in capturing the increased spread from the same $0.25 interbank rate. That TARP and Federal Reserve money at least trickled down to you and me.
But I must ask readers of yesterday's posting...where were the banking experts on Goldman Sachs? The "experts" again did not do their homework and instead took the easy way out by following the herd all the way to a significant under estimate of Goldman's 1st quarter profits. Banking analysts are beginning to remind me of tech analysts of the late '90s. Except being banking analysts and more conservative by nature, they wildly underestimate bank operational performance. Worse it would appear they follow the same pack leaders that missed the banking stock crater of 2008. Just last week (4/7) Mike Mayo, esteemed banking analytical expert, who you may recall launched coverage on the banking sector with extraordinary bearishness sending the banking industry stocks into a tailspin. This was followed by Richard Bove, another "great" banking sector analyst who answered Mayo with an "agreed" except for Citibank, JP Morgan Chase and Bank of America. Neither one of these analysts said buy Goldman or Wells Fargo. Am I making myself clear? If you want to follow the herd read the Wall Street Journal and listen to analysts who follow large cap banks and continue to play the momentum game with your investment decisions. Or you can keep reading and become more expert yourself.*
Now for the PPI. Bernanke should be very very concerned, as should we all, about the level of unexpected drop in the PPI. This index is used to gauge the prices producers earn for their goods available for sale. And what it suggests is huge price slashes to generate sales across the board. I like to call price slashes at the retail level forced devaluation of inventory. And we are all left to wonder, have the federal stimulus packages already begun to hint at the future negative effects of massive currency printing? We all live in a global economy, but it is clear that US Business and the US consumer remain the targeted buyers of products made in other countries. So massive inflation (or reduced value) of the US dollar forces other nations who sell to the US to ultimately devalue their own currency simply to make sales to the US. Did the reduced PPI hint at that after effect? Doubtful yet, but it must be a great concern to Bernanke. Deflation has a nasty habit of making everything less valuable and making workers and savers less motivated.
Initially when a government prints massive amounts of money, economists fear inflation. That's an easy concept to get, there is more money out there representing the Full Faith and Credit of the US Government. So if you assume, like most do in this analysis, that the Full Faith and Credit of the US Government is based upon its ability to increase its revenues through tax collections on an domestic economy that is growing slowly, and, there are more dollars now than there were 3 month ago, each dollar is worth a bit less as a representation of the Full Faith and Credit of the US Government. Which means sellers of goods need to raise their prices to maintain the same relative profitability. That's inflation. And that's step one in a long process of global currency devaluation (which I'll discuss in more detail another day).
*in fairness to Mayo and Bove, they rely on discussions and review of historic performance data provided them, in large part, by executives of the same banks they cover. Making their foundation of information modest at best.
Build Value Every Day
Brad van Siclen
Talk of the day surrounds Goldman Sachs and the PPI. Goldman has clearly hired excellent PR representatives to manage its new found national recognition as being the smartest, best commercial and investment bank the world has ever seen. Goldman now calls its need to pay back TARP funds a "Duty". Goldman like other stable commercial banks has enjoyed the same no-cost-of-capital advantages that Wells Fargo recently dined on. It must be great to have fired ten's of thousand's of employees, reducing the largest portion of its variable costs, and then have the Government hand you essentially no cost money from which to access the capital markets on a proprietary trading basis. (If you note only a hint of sarcasm, you are not reading my posts daily.) This is akin to a farmer not having to pay for seeds, fertilizer or feed, and then selling everything for pure profit minus the value of his own sweat labor - all in 90 days..amazing.
Does anyone know where Goldman's profits came from this quarter? Trading profits. During the first quarter, markets were up 25% across the board. Goldman took its share of the TARP money and money at 0.25% interest on federal interbank loans and invested it in the stock markets. Bang, $1.9 Billion in profits. Profits that will ultimately go to its remaining executives pockets in salary and bonuses. They are raising funds now by selling equity to repay the TARP loans. Then they ride their commercial bank designation and low, low cost of capital all the way to the Bank. Isn't US Government Led Capitalism great?
At least Wells Fargo made their surprise profits from fees generated in refinancings of business and home loans, and in capturing the increased spread from the same $0.25 interbank rate. That TARP and Federal Reserve money at least trickled down to you and me.
But I must ask readers of yesterday's posting...where were the banking experts on Goldman Sachs? The "experts" again did not do their homework and instead took the easy way out by following the herd all the way to a significant under estimate of Goldman's 1st quarter profits. Banking analysts are beginning to remind me of tech analysts of the late '90s. Except being banking analysts and more conservative by nature, they wildly underestimate bank operational performance. Worse it would appear they follow the same pack leaders that missed the banking stock crater of 2008. Just last week (4/7) Mike Mayo, esteemed banking analytical expert, who you may recall launched coverage on the banking sector with extraordinary bearishness sending the banking industry stocks into a tailspin. This was followed by Richard Bove, another "great" banking sector analyst who answered Mayo with an "agreed" except for Citibank, JP Morgan Chase and Bank of America. Neither one of these analysts said buy Goldman or Wells Fargo. Am I making myself clear? If you want to follow the herd read the Wall Street Journal and listen to analysts who follow large cap banks and continue to play the momentum game with your investment decisions. Or you can keep reading and become more expert yourself.*
Now for the PPI. Bernanke should be very very concerned, as should we all, about the level of unexpected drop in the PPI. This index is used to gauge the prices producers earn for their goods available for sale. And what it suggests is huge price slashes to generate sales across the board. I like to call price slashes at the retail level forced devaluation of inventory. And we are all left to wonder, have the federal stimulus packages already begun to hint at the future negative effects of massive currency printing? We all live in a global economy, but it is clear that US Business and the US consumer remain the targeted buyers of products made in other countries. So massive inflation (or reduced value) of the US dollar forces other nations who sell to the US to ultimately devalue their own currency simply to make sales to the US. Did the reduced PPI hint at that after effect? Doubtful yet, but it must be a great concern to Bernanke. Deflation has a nasty habit of making everything less valuable and making workers and savers less motivated.
Initially when a government prints massive amounts of money, economists fear inflation. That's an easy concept to get, there is more money out there representing the Full Faith and Credit of the US Government. So if you assume, like most do in this analysis, that the Full Faith and Credit of the US Government is based upon its ability to increase its revenues through tax collections on an domestic economy that is growing slowly, and, there are more dollars now than there were 3 month ago, each dollar is worth a bit less as a representation of the Full Faith and Credit of the US Government. Which means sellers of goods need to raise their prices to maintain the same relative profitability. That's inflation. And that's step one in a long process of global currency devaluation (which I'll discuss in more detail another day).
*in fairness to Mayo and Bove, they rely on discussions and review of historic performance data provided them, in large part, by executives of the same banks they cover. Making their foundation of information modest at best.
Build Value Every Day
Brad van Siclen
What to Expect this Week - 4 / 13 / 2009
The business world remains in flux. Having read many of the financial sections this weekend and listening to the financial networks and radio hosts this morning no one can agree on the path for the US economy for the next 3 months. Will it worsen, plateau, improve? I heard all three this morning.
One thing is for certain, volatility will remain in the medium to high range because we have extremely liquid markets and large amounts of uncertainty. Our best defense to this volatility remains large cap, industry leaders that are purchased at a relative value discount to their overpriced peers. And do not forget a 15% - 20% stop loss down side protection which moves up when your investment moves up. Sure your broker may complain, but its your money, right?
And when he's done complaining, ask where he or she is invested personally. Then watch those positions / issues carefully. It will give you some real insight into their value to you. You need to determine whether your broker is good at managing their firm's infrastructure (trade disputes, executions, clearing), research selection (discussing with you new ideas they believe in as well as new ideas they do not), and actual investment selections that match up to your investment profile. Anyone of these broker profiles is good enough. The key is knowing which one you are working with and remember the vast majority react to momentum in the markets and their tone on a specific day will correlate strongly to the Dow Jones Index daily trend.
This week should be more volatile yet again. We have a slew of earnings to be announced in this market combined with a overly cautious regulatory and reporting environment. We will see huge misses (because a small miss and a large miss is the same in a bear market), and smart public company executives who know they will miss their projected earnings or show a loss will use this opportunity to clean house. That is they will write down and expense everything they can from their balance sheet. These write downs will flow through the income statement and push earnings down further. The result for earnings misses is that we will hear 2 numbers from many reporting companies that miss their projected earnings, one will be earnings from operations, the other will be earnings from operations and one time charges.
The second type of earnings announcement we will hear is beating estimates by a large margin. This will be due to frightened financial and research analysts who would rather underestimate company earnings than due real research and economic application in the industry they are being paid to be "expert" in. I ask anyone with half a brain who paid attention to last week's huge beat of earnings expectations by Wells Fargo how this can ever happen? How is it that banking analysts can miss by that much? Does it not occur to them that Wells Fargo wrote off much of its bad debts already, reduced its variable costs dramatically (wages primarily), and has been operating on a virtual cost free basis (on capital) thanks to the government may actually show a real profit? Being fluent in research and industry speak and writing thick reports in support and poorly researched and analyzed information does not make anyone a good analyst.
Too many research analysts are making a living discounting the financial information provided them by self serving CEO's and CFO's of public companies. And this should be your perspective when surprises up or down on earnings occur.
Readers, corporate performance and results should not trend upward like a 20 degree angle. They should move about that trend line at least, sometimes higher, sometimes lower. Its when we see 2 deviations from that trend line we know that there is an issue. That's also when we as investors need to do our own investigation for value.
GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $10.76
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $11.33
Build Value Every Day
Brad van Siclen
One thing is for certain, volatility will remain in the medium to high range because we have extremely liquid markets and large amounts of uncertainty. Our best defense to this volatility remains large cap, industry leaders that are purchased at a relative value discount to their overpriced peers. And do not forget a 15% - 20% stop loss down side protection which moves up when your investment moves up. Sure your broker may complain, but its your money, right?
And when he's done complaining, ask where he or she is invested personally. Then watch those positions / issues carefully. It will give you some real insight into their value to you. You need to determine whether your broker is good at managing their firm's infrastructure (trade disputes, executions, clearing), research selection (discussing with you new ideas they believe in as well as new ideas they do not), and actual investment selections that match up to your investment profile. Anyone of these broker profiles is good enough. The key is knowing which one you are working with and remember the vast majority react to momentum in the markets and their tone on a specific day will correlate strongly to the Dow Jones Index daily trend.
This week should be more volatile yet again. We have a slew of earnings to be announced in this market combined with a overly cautious regulatory and reporting environment. We will see huge misses (because a small miss and a large miss is the same in a bear market), and smart public company executives who know they will miss their projected earnings or show a loss will use this opportunity to clean house. That is they will write down and expense everything they can from their balance sheet. These write downs will flow through the income statement and push earnings down further. The result for earnings misses is that we will hear 2 numbers from many reporting companies that miss their projected earnings, one will be earnings from operations, the other will be earnings from operations and one time charges.
The second type of earnings announcement we will hear is beating estimates by a large margin. This will be due to frightened financial and research analysts who would rather underestimate company earnings than due real research and economic application in the industry they are being paid to be "expert" in. I ask anyone with half a brain who paid attention to last week's huge beat of earnings expectations by Wells Fargo how this can ever happen? How is it that banking analysts can miss by that much? Does it not occur to them that Wells Fargo wrote off much of its bad debts already, reduced its variable costs dramatically (wages primarily), and has been operating on a virtual cost free basis (on capital) thanks to the government may actually show a real profit? Being fluent in research and industry speak and writing thick reports in support and poorly researched and analyzed information does not make anyone a good analyst.
Too many research analysts are making a living discounting the financial information provided them by self serving CEO's and CFO's of public companies. And this should be your perspective when surprises up or down on earnings occur.
Readers, corporate performance and results should not trend upward like a 20 degree angle. They should move about that trend line at least, sometimes higher, sometimes lower. Its when we see 2 deviations from that trend line we know that there is an issue. That's also when we as investors need to do our own investigation for value.
GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $10.76
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $11.33
Build Value Every Day
Brad van Siclen
Tuesday, April 7, 2009
Ahead of the Weekend, Something to Consider - 4 / 9 / 2009
1) Not Doing your own Research - Folks it shocks me that day traders and individual investors alike pick up the paper, look at a trend line, log into their on-line account and buy. That's reckless. Stocks are the currency of corporations. They are money, and too many of us throw money at a stock as if we were gambling. And Guess what, the odds are worse than at the casino. Want to reduce your investment down side dramatically? Take an extra 5 minutes and determine the relative value of your potential investment (Price Earnings Ratio, Operating Income multiple) against its industry competitors. When I look at Dell as an investment, I also look at HP. Is Dell by these easy ratio's priced at a lower multiple? An equivalent Multiple? Or at a higher multiple? If you think, as I do, that Dell is a better company than HP, then buy it IF it is trading at a lower multiple. This simple relative value review which can be done on yahoo or google finance will prevent most short swing losses which are your biggest enemy.
2) Momentum Trading - I have watched great traders get burned regularly by momentum plays. The Market for a certain stock goes up quickly and in they go, under the belief that the liquidity is so great that they can get out if they need to. These same expert traders, and many I work with, forget that there are other traders that have already hedged their upside in the very same stock, and therefor they have already locked in their profits and are now just watching the rest of the herd speculate.
3) Not Staying Disciplined - Here's what I mean. Each one of us has our own investment model / reasons. Write it / them down. Stick it to your computer screen. Each time you make a trade or investment, look at your model before you click "buy". Think about how many times you have hurt yourself by playing outside that model.
4) Believing that a Quick Investment Return Validates Your Expertise - Guess what, you are not an expert. Not even the so called experts are experts. See the Market recently? Quick Investment returns are luck people. They were made by your decision to speculate on an issue before some other Speculator bought those shares from you. That's called the Greater Fool Theory. If you think it something else, you will be the Greater Fool next time.
5) Blindly Following Your Broker - I know you have heard this one before, but having run 400 Broker's myself during the late '90s and through 2006 - I can tell you that Brokers, Investment Managers and Advisers, have no better information than you do. In fact their information is almost entirely speculative and momentum driven. Please do not agree to a trade without being in front of your computer screen so you may at least follow the steps laid out in 1) above. And by no means believe that the research analyst suggesting the trade to your broker has done this either.
Remember, you can't grow your portfolio unless you protect the gains or principal you brought to the table. Disciplined investing by your own definition with a few helpful downside protectors is really the best method to winning in the stock market.
Build Value Every Day.
Brad van Siclen
2) Momentum Trading - I have watched great traders get burned regularly by momentum plays. The Market for a certain stock goes up quickly and in they go, under the belief that the liquidity is so great that they can get out if they need to. These same expert traders, and many I work with, forget that there are other traders that have already hedged their upside in the very same stock, and therefor they have already locked in their profits and are now just watching the rest of the herd speculate.
3) Not Staying Disciplined - Here's what I mean. Each one of us has our own investment model / reasons. Write it / them down. Stick it to your computer screen. Each time you make a trade or investment, look at your model before you click "buy". Think about how many times you have hurt yourself by playing outside that model.
4) Believing that a Quick Investment Return Validates Your Expertise - Guess what, you are not an expert. Not even the so called experts are experts. See the Market recently? Quick Investment returns are luck people. They were made by your decision to speculate on an issue before some other Speculator bought those shares from you. That's called the Greater Fool Theory. If you think it something else, you will be the Greater Fool next time.
5) Blindly Following Your Broker - I know you have heard this one before, but having run 400 Broker's myself during the late '90s and through 2006 - I can tell you that Brokers, Investment Managers and Advisers, have no better information than you do. In fact their information is almost entirely speculative and momentum driven. Please do not agree to a trade without being in front of your computer screen so you may at least follow the steps laid out in 1) above. And by no means believe that the research analyst suggesting the trade to your broker has done this either.
Remember, you can't grow your portfolio unless you protect the gains or principal you brought to the table. Disciplined investing by your own definition with a few helpful downside protectors is really the best method to winning in the stock market.
Build Value Every Day.
Brad van Siclen
Dow Jones Neck Snapping - 4 / 7 / 2009
Daily Market watchers beware. Do not get caught by the talking heads providing clever prose like "Bear Market Rally", "Value Shopping", "Lack of Bull Market Conviction", "by historical measures, standards", "Backing and Filling". These folks are not expert in the market because they have yet to recognize that the Dow Jones Index is ruled by day traders. And day traders trade the index against news announcements. Today for example, Alcoa announced bad earnings. This was used as the rational for the Dow Jones futures being down. Bad earnings in this market are a surprise? Definitely not.
So ask yourself why the markets are moving lower. Its the emotional response by traders who are Bearish and sell the index into bad news. They are not selling Alcoa, they are selling the index. Volatility exists in an uncertain market. But volatility is amplified by index day traders who have more interest in liquidity and volatility and virtually no interest in individual companies. There are no downside earnings surprises during a recession. There are only upside earnings surprises in this market.
My latest "expert" bashing surrounds the amazing banking analysts who have begun releasing (finally) downgrades in bank stocks. WOW, brilliant. It just shocks me that after 6 months of the greatest financial crisis of the last 50 years analysts are still comming to the table with bank down grades or initiating coverage with a "sell" or "underperform". Where people is the value here? And what should we be doing ourselves.
First, enjoy the entertainment. Second, seek the best quality large caps trading at a discount to their peers on the simple P/E standard. Yesterday began my new value based portfolio with GE at $10.60, and Dell Computer at $10.00. GE has a 20% downside stop loss given its inclusion in the Dow Jones Index. Dell has a downside stop loss of 15%. I expect these companies operations and profitability to perform modestly better than their publicly listed competition.
So unfortunately we can not use equity indexes, the Dow, the S & P, NASDAQ as anything more than entertainment purposes right now. When the market is up 100 points, "experts" and the media make statements like "all the bad information, and bad earnings have been built into the current market levels". When the market is down 100 points, suddenly bad banking sector information is a reason for the slide of the market. But in truth none of this information is new and it is all, again, simply an excuse to sell or buy the indexes.
Pick shares in companies with proven value that have been unfairly beaten down over the last few months. They will have the best principal downside protection built into their long term investor base, and they will have be the first to move fundamentally when fund managers think its safe to put money back into the market.
GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $11.19
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $10.33
Build Value Every Day
Brad van Siclen
So ask yourself why the markets are moving lower. Its the emotional response by traders who are Bearish and sell the index into bad news. They are not selling Alcoa, they are selling the index. Volatility exists in an uncertain market. But volatility is amplified by index day traders who have more interest in liquidity and volatility and virtually no interest in individual companies. There are no downside earnings surprises during a recession. There are only upside earnings surprises in this market.
My latest "expert" bashing surrounds the amazing banking analysts who have begun releasing (finally) downgrades in bank stocks. WOW, brilliant. It just shocks me that after 6 months of the greatest financial crisis of the last 50 years analysts are still comming to the table with bank down grades or initiating coverage with a "sell" or "underperform". Where people is the value here? And what should we be doing ourselves.
First, enjoy the entertainment. Second, seek the best quality large caps trading at a discount to their peers on the simple P/E standard. Yesterday began my new value based portfolio with GE at $10.60, and Dell Computer at $10.00. GE has a 20% downside stop loss given its inclusion in the Dow Jones Index. Dell has a downside stop loss of 15%. I expect these companies operations and profitability to perform modestly better than their publicly listed competition.
So unfortunately we can not use equity indexes, the Dow, the S & P, NASDAQ as anything more than entertainment purposes right now. When the market is up 100 points, "experts" and the media make statements like "all the bad information, and bad earnings have been built into the current market levels". When the market is down 100 points, suddenly bad banking sector information is a reason for the slide of the market. But in truth none of this information is new and it is all, again, simply an excuse to sell or buy the indexes.
Pick shares in companies with proven value that have been unfairly beaten down over the last few months. They will have the best principal downside protection built into their long term investor base, and they will have be the first to move fundamentally when fund managers think its safe to put money back into the market.
GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $11.19
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $10.33
Build Value Every Day
Brad van Siclen
Monday, April 6, 2009
The Capital Markets Offer New Value - 4 / 6 / 2009
Having poured over financial journals and newspapers this weekend, it would seem we have reached the Rubicon. This is one of the rare instances in which we can truly say the Dow Jones index has found its fair value. New information has turned to a slow drip from the torrential gushers of financial information in January, February, and March. The upside last week was really the balance of remaining short covers and some new found optimism from the G20, and this weekend analysts had either nothing new to say or nothing to say at all. So this, value minded folks, is the time to go hunting. It's the time to begin seeking out great, large cap value and begin rebuilding that portfolio.
Please remember that there will be ups and downs as non-value minded speculators fuel daily momentum each way. There are very important disciplines to remember in value investing. Value looks out a year at least. Value sets its price targets the day of purchase. And value puts a minimum 15% downside stop loss into its principal purchases.
I won't pretend to have the ability to pick the best performers this year, but I will discuss the why's and hows of the companies purchased, always keep an eye on principal investments made, current pricing, and also manage stop loss barriers so those that chose to follow have a decent road map and understanding of my current thinking on each of the positions discussed today and in the future.
Also please recognize that in the spirit of keeping this daily piece limited to a 2 minute read, I won't include tedious competitive industry analysis, financial statement reviews, discussions of management, foolhardy projections, and misguided valuation models resulting in a 10 page research report for each. If you want to know why, please re-read past postings paying close attention to statements on research analysts and wall street's so called experts.
I'll begin with 2.
1. General Electric - "GE", NYSE, current price: $10.60 - This Company's stock price is down 60% in the last 12 months. Why? First, they are one of the most fully valued companies at any time. More analysts cover GE both in the US and in the World than cover virtually any other company. GE is considered the bell weather stock for the US economy. Fear of GE's GE Capital division's liabilities and massive redemptions in mutual and equity funds were also responsible for the price collapse. So now GE sits with a 6.3x trailing PE multiple. In recessions GE, like IBM, is able to sustain its operating margins and grow its sales. They can do this while their competitors fall victim to expenses assumed with overly optimistic fixed costs. Most of these costs were added by competitors in 2007. I expect GE to show modest revenue growth, but significant earnings growth (vs. Research "experts" predictions) and have a price target of $15.50 (that's 50% growth this year). My stop loss is a bit more than 15% given its Dow Jones index related volatility, and in at $7.95.
2. Dell Computer - "DELL", NASDAQ, current price: $10.00 - This company has the same industry position advantages as GE. They are the Walmart of the computer industry in the following way - their inventory management and supply chain management combined with their assembly costs - provide them with decisive margin control advantages its competitors do not yet have. Add to this their customer loyalty and quick service and you have a perennial winner in a commoditized segment. Currently trading at 8.0x earnings, this company's stock was beaten down by fund redemptions as well, and while I do not expect to see $30.00 any time soon, i do expect limited downside risk at $8.50 (15%) and have a price target in at $14.00 - that's 40% this year.
There you have it, 2 really great value investments beaten down unfairly by market forces.
Build Value Everyday
Brad van Siclen
Please remember that there will be ups and downs as non-value minded speculators fuel daily momentum each way. There are very important disciplines to remember in value investing. Value looks out a year at least. Value sets its price targets the day of purchase. And value puts a minimum 15% downside stop loss into its principal purchases.
I won't pretend to have the ability to pick the best performers this year, but I will discuss the why's and hows of the companies purchased, always keep an eye on principal investments made, current pricing, and also manage stop loss barriers so those that chose to follow have a decent road map and understanding of my current thinking on each of the positions discussed today and in the future.
Also please recognize that in the spirit of keeping this daily piece limited to a 2 minute read, I won't include tedious competitive industry analysis, financial statement reviews, discussions of management, foolhardy projections, and misguided valuation models resulting in a 10 page research report for each. If you want to know why, please re-read past postings paying close attention to statements on research analysts and wall street's so called experts.
I'll begin with 2.
1. General Electric - "GE", NYSE, current price: $10.60 - This Company's stock price is down 60% in the last 12 months. Why? First, they are one of the most fully valued companies at any time. More analysts cover GE both in the US and in the World than cover virtually any other company. GE is considered the bell weather stock for the US economy. Fear of GE's GE Capital division's liabilities and massive redemptions in mutual and equity funds were also responsible for the price collapse. So now GE sits with a 6.3x trailing PE multiple. In recessions GE, like IBM, is able to sustain its operating margins and grow its sales. They can do this while their competitors fall victim to expenses assumed with overly optimistic fixed costs. Most of these costs were added by competitors in 2007. I expect GE to show modest revenue growth, but significant earnings growth (vs. Research "experts" predictions) and have a price target of $15.50 (that's 50% growth this year). My stop loss is a bit more than 15% given its Dow Jones index related volatility, and in at $7.95.
2. Dell Computer - "DELL", NASDAQ, current price: $10.00 - This company has the same industry position advantages as GE. They are the Walmart of the computer industry in the following way - their inventory management and supply chain management combined with their assembly costs - provide them with decisive margin control advantages its competitors do not yet have. Add to this their customer loyalty and quick service and you have a perennial winner in a commoditized segment. Currently trading at 8.0x earnings, this company's stock was beaten down by fund redemptions as well, and while I do not expect to see $30.00 any time soon, i do expect limited downside risk at $8.50 (15%) and have a price target in at $14.00 - that's 40% this year.
There you have it, 2 really great value investments beaten down unfairly by market forces.
Build Value Everyday
Brad van Siclen
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