Weekend Readings

avatar By: IS
Date posted: 05.24.2013 (3:00 am) | Write a Comment

taxesI was impressed overall with the quality of the discussions when Apple’s Tim Cook testified regarding Apple’s taxes… that being said, there is an issue, a very difficult one and if you look at the chart on the right, you’ll see that it’s getting worse and worse. Here are some readings:

General Readings

-How to buy happiness @ LA Times
-If cable is dying why is it making so much money? @ Atlantic

Dividend/Passive Income Readings

-Can Disney (DIS) please investors as much as it pleases my kids? @ TheDividendGuyBlog

Tech Stock Readings

-Is Netflix (NFLX) the exception that proves the rule? @ SA
-Will Facebook (FB) be forced into other social acquisitions? @ SA
-Yahoo (YHOO) is buying Tumblr @ TechCrunch
-Apple’s (AAPL) international tax structure @ TheBigPicture

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Is Yahoo (YHOO) The Next Japan Trade?

avatar By: IS
Date posted: 05.23.2013 (3:00 am) | Write a Comment

mayerI’ve been very impressed by how quickly things have moved in Japan. I read about the fact that markets rarely move smoothly because as soon as they anticipate something happening, they’ll move as quickly as possible. I guess the same will happen in the US when the market ends up believing that interest rates will rise. They’ll immediately anticipate (or try to) where rates will go up to and adjust in consequence. It’s rarely as smooth as you’d think.

Yes, you might think this Japan rise has been smooth, but if you think about the fact that it is one of the biggest markets in the world and is up 80% or so in a few months, I’d say that the move is very rapid.

Back to today’s post. Things are moving very fast at Yahoo! These days ever since Dan Loeb brilliantly got Marissa Mayer in as CEO.. the stock has been doing incredibly well:

YHOO

It’s not just confidence, there’s a lot happening on the ground as well:

flickr_jan07-New HR policies regarding remoteworking, maternity leave, free food, new smartphones, etc.
-New focus on specific areas such as mobile (where new beautiful apps were launched), search, etc.
-Complete Revamp of the Yahoo homepage, major changes in Yahoo mail and Flickr, one of Yahoos more social and successful products (arguably Yahoos only true web 2.0 property).
-Small acquisitions (mostly in order to gain top notch experts but also some technology).
-The more important Tumblr acquisition which I’ve Tweeted about.. Great move in my opinion, which Facebook should have done.

Things are Moving at the Speed of Light

As you can imagine these moves are generating a lot of excitement and interest in Yahoo but there’s also been a lot of criticism from employees, the press, employees, competitors, etc. It’s been a very rocky ride but as is the case with Abe in Japan, Marissa Mayer is moving things, taking big risks, etc.

What Should Happen Next?

Now that Yahoo has started to focus on many critical areas, it has started to move into properties that are still highly relevant. An overhaul of Flickr was a necessary and logical first step. What should be next? I think there are a few candidates:

Yahoo! Finance
Yahoo! Sports
Yahoo! News
Yahoo! Answers

yahoo-finance-logo-150x115Why these specifically? Because its useless to have 1000 good products. What Yahoo needs is to have 10 incredible properties. Each area would require different elements but let me give the example of Yahoo finance because it’s one I know very well. Despite competition from dozens of high profile names that include Google Finance, Yahoo continues to be a leader. It has a product that is easy to use and understand. What could Yahoo do?

A couple of key acquisitions: Yahoo already integrates content from SeekingAlpha and StockTwits, two very solid upcoming finance players. I’m not sure they are for sale but if I were Marissa Mayer I’d certainly consider those. It would make a ton of sense to have them remain independent (as is the case with Tumblr) but have an even bigger incentive for deeper integration of their data and content into Yahoo finance. In many ways they represent the future of finance on the web.

SeekingAlpha has a unique platform where 2 million members gain access to high quality information about stocks, economics, etc.

StockTwits was initially built on top of Twitter but is clearly independent now and has been growing extremely well by integrating those 2 products, Yahoo could remove some of the least attractive parts of Yahoo finance and have a much stronger community (or 2 in fact).

Then Yahoo could work on improving the general design, making it more modern with a responsive design, a new mobile app, etc.

Finally, I think there is also potential to launch very solid desktop & mobile apps that would be powered by the new Yahoo finance data. It would not compete with Bloomberg for many stock professionals but would be a major improvement for most other traders that can’t afford the Bloomberg offering. After all, Yahoo would arguably be the best placed company to provide such data.

These are just a few examples for Yahoo! Finance but I think you could argue that the same could be applied to at least 45 of Yahoos major properties.

How Much Upside Exists?

You might be wondering how much upside exists at Yahoo. I don’t think anyone expects the stock to increase by 80-100% in a few months, especially considering the rise that we’ve already witnessed. One thing to note is that Yahoo’s core company was basically valued at $0 up until Marissa Mayer joined. The value of Yahoo’s stock was almost equal to:

Yahoo stock = Cash + Value of Yahoo Japan stake + value of Asian properties stakes (mainly Alibaba)

The expectation was for everything else to eventually die off. I think it’s fair to say that the new Yahoo is working on preventing that. It’s difficult to say how much upside there remains but I would say its still significant. In terms of downside, I just don’t see that much at this point which makes going long Yahoo exactly the type of trade I like to put on.

Disclaimer: No position on Yahoo (YHOO)

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Dividend Yield on Cost Is Irrelevant

avatar By: IS
Date posted: 05.22.2013 (3:00 am) | Write a Comment

yieldThere are some expressions used that I just don’t get. Maybe it’s me that’s way off, or maybe those that mention it don’t know what they’re talking about. Today, I mentioned one of those in a newsletter that I sent out and wanted to get your thoughts on another one. I’ve seen this one mentioned several times on blogs, but even in discussions with friends. Before giving you my opinion, in case you don’t know, dividend yield on cost is generally described as:

-the annual dividend paid out by a company / average cost of that position

In some cases, it could be perceived as useful by some dividend-focused investors. If you buy a stock for $50 that pays a $1.50 dividend (3% yield) and that over 5-10 years that dividend increases to $3/year, some would say that the yield on cost is now 6%. In a way, it does represent the fact that the investment probably did very well. The stock increased its dividend by 100% and its price also likely increase significantly. If the yield remains at 3%, the stock would now be worth 100% more.

So yes, I could see how the average cost would be “useful” in such a context.

But tools to analyze stocks should work most if not all of the time. There are countless examples where this does not work as well. Take that same stock described earlier and imagine that the company is struggling. Yes it did increase the dividend over the years but it is also paying out more than what it is making (payout ratio > 100%). In such a scenario, the stock price would have decreased significantly.

So yes, both stocks would have a 6% dividend yield on cost… but they can’t be compared.

Average Cost Is (Mostly) Irrelevant

There is one big reason why I look at my average cost; taxes. When trading in a taxable account, average cost does make a difference in trying to determine if a position should be closed, especially near year-end.

But otherwise? Not in a million years. If I purchased a dividend stock 10 years ago in a taxable account and it pays out a 3% dividend yield, I would evaluate it in the same way as any other stock no matter if I’m up 10% or down 50% on the stock, it’s irrelevant. Yes, from a psychology standpoint, it’s difficult to sell a stock and make a loss “official”, we always hope the trade will revert. But in most cases, it’s a big mistake to hold on to a stock for those reasons.

Do you believe in using yield on cost or average cost in general? If so, how do you use it?

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About Those Tax Havens

avatar By: IS
Date posted: 05.21.2013 (3:00 am) | Write a Comment

tim-cook-blog1With Apple CEO Tim Cook set to testify this week regarding tax havens and how Apple and many other companies in the US pay (a lot) less taxes than we’d expect them to pay, it will be very interesting to see what message comes out from the media. I fear it will be that Apple is evil or that we should just fix the tax loopholes. It’s not that simple. Like so many other problems, this is an incredibly tough problem to address. There are thousands of ways to avoid or diminish tax bills and global companies are finding new innovative ways every year. These methods are generally legal and do not necessarily rely on tax loopholes so solving them is not easy.

I’ve seen many smart people such as Jeffrey Sachs write about this but I still do not see many ways to do it being discussed. It’s much easier said than done.

Oh and let’s all blame Apple please.. it’s far from alone, here are others escaping the 35% corporate tax rate:

Effective tax rate

Apple = 9.8%
Google = 11.9%
Yahoo = 11.6%
Amazon = 3.5%

One article that seems to explain some of the challenges of what governments are trying to do was written on Baekdal. If you’re interested in the subject, I recommend it! It’s an incredibly complex issue and there has to be a global solution (which seems like a daunting task) if Apple and others wants to make sure it does not lose its “tax advantage” while competitors continue to get it…

Should be a very interesting debate!

more:

-Seven tax avoidance techniques used by Apple
-Apple’s web of tax shelters saves it billions
-

 

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Time To Start Investing On Margin?

avatar By: IS
Date posted: 05.21.2013 (3:00 am) | Write a Comment

In my quest to become financially independent, I’ve been looking at many different ways to increase my net assets. One method that is often used is leverage. In some cases such as students, it’s unfortunate and is actually a worrying trend, just look at this chart from the Wall Street Journal:

debt

 

What I’m considering though is something I’d personally consider less risky. I’m thinking about borrowing some money in order to invest it in the markets, what many would call investing on margin. It seems like many others are doing it these days:

leverage

 

Why Would I Do This?

It’s fairly simple in fact. If I’m able to pay 3% or so on my mortgage for example and expect to make more than that in the markets, it would make sense to increase my assets by borrowing more. Over a few months or even 2-3 years, the stock market returns might not outperform whatever debt I’d pay. But as I increase the amount of time that I do this, it becomes more and more likely that I will be making money out of this strategy.

When I met financial advisers a few months ago, this was one of their primary recommendations. Why? Because they said I had the right profile. Look at the result of investing $100,000, paying 3% and making 4.5% over 25 years:

margin

 

$91,000 is significant. The results would certainly be different (could be better or worse), but I don’t think it’s unreasonable to expect to make 1,5% more on the investments than what is paid on the margin over 25 years, right?

Is This For Everyone?

I’m sure that any of you could answer this question. No, of course not. There is obviously risk involved in such a strategy so this would be a good strategy for investors that:

-Can and are willing to support above-average risk (being young, having decent revenues and assets are some of the factors)
-Understand the strategy (I understand that my investments could decline over 1, 2, 5 years and maybe even longer)

The benefits are significant though as I would be using other’s people money (OPM) to increase my own assets.

How Would I Do This?

I will likely start doing this later this year. At first, I will probably take some money I had expected to pay back my mortgage with and reinvest it. My business partner told me this was not really leverage and I guess technically he is right. But if I had planned to pay back $20,000 of my mortgage later this year and reinvest it instead, I will be more “leveraged” than I had anticipated.

Over time, I might start investing on margin. For example, my investing accounts are margin accounts, so I could technically invest more than what I have in the account. I’ll have to get a better idea of the interest rates involved.

What Kind Of Investments?

It’s unlikely that I’ll be making riskier investments with this strategy for now. I’m much more likely to buy dividend stocks or ETF’s than doing picks such as my long term speculative stock picks. I certainly could but for now I’m trying to give myself the best odds of coming out ahead using this strategy.

Do any of you invest on margin? If so, how long have you been doing it and what types of investments do you do?

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New Trade: Long Priceline (PCLN) & Short AOL Inc. (AOL)

avatar By: IS
Date posted: 05.20.2013 (3:00 am) | Write a Comment

It’s been a little while and I’ve certainly missed it. Today, I’m starting off by closing 2 trades done earlier in the year. First off,

Long Google (GOOG) & Short Valueclick (VCLK): +24,79%

GOOG

 

VCLK

 

Long AOL (AOL) & Short Demand Media (DMD) -26,66%

AOL

DMD

Today, I am opening a new trade that involves 2 stocks trading at comparable forward P/E ratios. Yes, AOL has been a difficult name for me to trade and it has done incredibly well in the past 18 months or so. But if you look at fundamentals, I don’t think you could possibly compare these 2 stocks. Just take a look at their recent growth profiles:

AOL Revenue Quarterly YoY Growth Chart

AOL Revenue Quarterly YoY Growth data by YCharts

You can also take a look at the numbers for both stocks:

TickerNamePriceEPSPE RatioPE Next YearReturn YTDSales GrowthAnalyst ratingBook ValueBetaRevenue/Share
AOLAOL Inc37.1611.517.8516.8526.14-0.47428.17124.06
PCLNpriceline.com Inc813.6628.4827.1817.1328.9620.794.5780.691.13105.56

Long Priceline (PCLN)

Priceline has been one of my favorite stocks for years. It seems to always be underestimated. Why? Perhaps because it’s a fairly big name but makes little noise. It’s also evolving in a fairly competitive industry. It has remained a solid player though and I do think the recent acquisition of Kayak will turn out to be key for Priceline’s long term future. If growth keeps up as most analysts expect, I don’t think its current price is exaggerated.

PCLN

Short AOL (AOL)

AOL was a star last year and continues to do fairly well in 2013. Part of it is due to solid execution by the Tim Armstrong team but it’s also due to some one time moves such as the patents sale. In the end, it’s difficult for earnings to increase quickly when sales are no, especially in the ultra competitive content business where AOL competes with the likes of Demand Media (DMD), Yahoo (YHOO), IAC Interactive (IACI), etc

AOL

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