Archive for November, 2008

Is Baidu.com (BIDU) getting crushed for good reason?

By: admin | Date posted: 11.19.2008 (4:00 am)

Have you ever heard of Baidu.com? Kidding right? You have never heard about the fourth most used search engine (according to Alexa.com)? Ok, I can see how the website being Chinese might explain part of it…:) Baidu made a big splash a few years ago when it was deemed the next Google and rose over 200% after its IPO.

Since then, it has been experiencing the growth you would expect from China’s top engine and its revenues have increased as well. They increased by over 100% last year. Just look at its latest income statements:

FQ3 2008 FQ2 2008 FQ1 2008 FQ4 2007
Revenue 134 115 80 77
Revenue Growth 16.49% 43.92% 4.36% 16.94%
Gross Margin 66.34 64.99 60.20 62.17
Research & Development 11 10 7 6
R&D/Sales (%) 8.51% 8.86% 8.95% 8.15%
SG&A 35 35 28 24
SGA&/Sales (%) 26.27% 30.56% 34.55% 31.30%
EBITDA
EBITDA/Sales (%) 0.00% 0.00% 0.00% 0.00%
Operating Margin 40.07% 34.43% 25.66% 30.87%
Pretax Margin 36.10% 34.22% 33.61% 35.32%
Tax Rate 5.38% 2.80%
Net Margin 37.85% 33.02% 25.52% 38.50%
EPS excl Extraordinary Items (not diluted) 1.4839 1.1124 0.60 0.87
EPS Growth (%) 33.40% 85.83% -31.53% 23.54%
Baidu is certainly a major growth story, however it got slammed by a major drop of 22% in the markets earlier this week when some reports out of China reported that it was doing something that even in China is considered to be very serious. When you searched for certain medications on their search engine, you would see results on the first page not of legitimate companies but of sellers of knock-offs, that were illegal. Bad? Yes, very. And this will certainly bring some legal issues to Baidu as well as bring a lot of other questions about its policies and how it is generating its revenues. But I still consider Baidu to be an attractive investment, mainly for these 2 reasons:

-Let’s not forget where this company operates: China. While the reportred practice is serious and would certainly bring massive problems to a US company, in China the playing grounds is very different as rules are not as clear and not as applied. What Baidu did was certainly illegal but we should not judge Baido according to US laws only.

-Its valuation has become very very attractive. Depending on what dates and estimates you are looking at, Baidu is trading at similar P/E ratios as Yahoo, which to me seems incredible when we look at the fiasco that Yahoo is in. Baidu has a terrific market position in perhaps the world’s top growth market, not exactly the declining market share & flat revenue position of Yahoo.

So overall, while it is certainly important to consider the impacts of the legal issues that Baidu is facing, I do consider Baidu(BIDU) to be a BUY. It could even be bough while going short Yahoo(the major risk to that would be a surprise new bid by Microsoft for YHOO).

More on this topic (What's this?)
Why Risky Baidu Could Still Make You Money (Investment Underground » Page n..., 12/23/11)
5 Tech Stocks To Avoid In 2012 (Investment Underground » Page n..., 1/28/12)
Read more on Baidu.com at Wikinvest

Nortel Networks (NT)….opportunity or going to 0$?

By: admin | Date posted: 11.17.2008 (4:00 am)

Nortel Networks is one of those companies that has so many stories associated with it. Based in Canada, it profited greatly from the technology boom in the early 2000′s and among other things, was part of the huge infrastructure boom of fiber optics. And while many of the similar companies went under, a few survived but they seem to be stuck in a restructuring mode and seem to always be in catch-up mode. Now, one of the tough parts to value (as is the case for the auto industry in the US) is how a possible government intervention could be structured and what it would mean for the common stock value. At its height, Nortel (NT) was worth an amazing 10% of the TSX60 index and has a symbolic value that could help the Canadian government help it out.

Last week, Nortel released its latest earnings and it wasn’t very nice. In fact, it was so bad that the stock continued to tumble and got a price target of 0$ by RBC analyst Mark Sue. Sure the company still has a lot of cash, but it is going through it at a worrying rate and RBC anticipated it could be down to some trouble by the end of next year. With a company down 95% from its high, revenues declining and employees being laid off, it’s certainly not looking very bright in Nortel’s future. “Without government intervention or major financial sponsors, Nortel may run of out cash before its $1-billion, 2011 bonds mature,” Mr. Sue said. “Our price target of $0 represents our belief that bankruptcy is a distinct possibility and common shareholders are last in line.”

If you compare the numbers ending September 30th 2008 to the numbers for the 3rd quarter of 2008, you will see lower revenues, a lower gross margin, as well as an important loss of $3,5B

And with the current economic problems, it’s difficult to think that there will be a big turnaround for Nortel. But still, a major part of the value of Nortel is because of the expected bankruptcy, but in the case where it could escape that ending, it could be worth a lot more. “It’s either worth $0 or it’s worth a lot more, and I think it’s worth more,” he said. “They have invested $20-billion in research in the last 10 years. I know people have been disappointed for the better part of 10 years, but there’s better value here than the stock is implying.”

Still, in my opinion, it’s better to stay away from NT for the time being, it’s just too difficult to trade on hopes of government interventions as they can be done in ways that can make the stock worthless, or in ways that could improve the value of equity, you just never know.

More on this topic (What's this?)
NT Nortel Networks Files for Bankruptcy (Kirk's Market Thoughts, 1/14/09)
What?! Nortel shares a double near-term? (Canadian Business Blog, 11/14/08)
Read more on Nortel Networks at Wikinvest

Investment Talking

By: admin | Date posted: 11.15.2008 (4:56 am)

Another great week of fluctuation has past and good stock picks are all over the place. The real question is “when the market will get rid of that big fat bear?”

Every Saturday, The Intelligent Speculator does a review of good read around the blogosphere. Here’s what caught my attention this week:

Nurseb911 presents Taking Stock in MFC: posted at Triaging My Way To Financial Success

Dorian Wales presents Review: The Gone Fishin’ Portfolio by Alex Green posted at The Personal Financier.

D4L presents Stock Analysis: Emerson Electric Co (EMR) posted at Dividends4Life.

Nucor Corporation (NUE) Dividend Stock Analysis posted at Dividend Growth Investor.

How Is What We Are Going Through Now Different From The Great Depression in the 1930’s? posted at My Investing Blog.

How an $800 Tax Bill Taught Me Not to Be a Greedy Idiot posted at The Money Hawk.

Carnivals:

Carnival of Investing

Carnival of Personal Finance

Festival of Stocks

Trading on the news?

By: admin | Date posted: 11.14.2008 (4:00 am)

Yes, you read that title right. One of the recent trends that has been gaining a lot of traction is a new form of investment: “Event Trading”. In short, you can bet on many specific events, either as a speculation or perhaps to hedge an investment of yours in some way. Over the past few years, many sports betting companies offered a few such possibilities, but the market has been growing and is now at the centre of much discussion.

Of course, there are many legal aspects to this. Internet gambling is illegal in many places and on a grey lines in others while it is perfectly legal in many smaller states as well as in most European countries. Great-Britain is a leader in the industry.It is still unclear if this should be regarded as gambling or as investing and in terms of legislation, it makes a big difference. The highly regarded Financial Analysts Journal (FAJ) has actually said that the CFTC (Commodity Futures Trading Commission) has started to look into the question.

This certainly offers interesting possibilities. For example, say you had a feeling that John McCain was going to pull off a big upset last Tuesday? Well, you could have made 14 times your money betting on it. You can even bet on who will be the Republican nominee for the 2012 elections (feel like Sarah Palin has a shot, you can already place a bet on her). But there are also some other bets such as a possible attack by China on Taiwan. If you have some important investments in Taiwan (such as possibly a position on EWT) then an event trade might be a very good hedge for your investment. One of the leading websites to currently offer such trading is Intrade, a company based in Ireland. There is even a growing number of publications dedicated to trading events and how to build models around it.

There is in fact an almost unlimited amount of trades that could be offered as the business evolves but even right now, you can bet on arts, entertainment (box office returns, tv ratings, etc), weather, financial events, legal, politics, scientific discoveries, technologies and even on space travel.

Another possibile hedge would be to have your position on Google or Yahoo for example and you can then take a position on their respective market share in searches, which could be a hedge but it might also be possible to establish new trading strategies based on event trading, certainly something that will evolve as time goes by.

More on this topic (What's this?)
Investing in Online Gambling (Wealth Daily, 4/21/09)
2 Gambling Stocks You Can’t Afford to Ignore (Jutia Group, 1/20/12)
Read more on Station Casinos at Wikinvest

Sovereign Wealth Funds

By: admin | Date posted: 11.12.2008 (4:00 am)

Over the course of the past decade or so, a new group of funds has been gaining more importance in the financial markets and the economy throughout the world; Sovereign Funds. What are these funds? They have a lot of misconceptions about them, often because lately the ones that we have heard most about are funds that come from Arabic countries. But actually, a lot of countries manage such funds, many of them are Western countries.

One of the first known funds was established such fund was set up by the government of Norway, the Petroleum fund (its funds are mostly accumulated on taxes for the oil industry in Norway) is managed by a division of the Norway central bank. They established a fund in 1990 to be able to establish a better retirement for its citizens. Believe it or not, this fund now manages almost 400$USD Billions! For some reason, this fund has not been at the centre of a controversy. But other funds, especially those from the middle east, have been bringing up a lot of debates among regulators in the past few years.

An important difference with sovereign funds is that they often have different goals than simply a risk/return objective. That is even more true in some funds such as ones in Abu Dhabi (the largest in the world with about 875$USD Billions). These funds often also have strategic objectives to either gain an exposure or a position for its government/country that might profit in other ways than economical. If you remember well, a few years ago, there was a big debate in the United States over the idea of letting a sovereign fund from Dubai buy some ports in the US and the investment never happened after all because the US viewed these ports as critical to its national security.

One of the main problems with these funds is that they are subject to even less regulations than Hedge Funds which translates into governments, regulators and the media/populations not knowing what they are up to. This year, they have been seen as a force for the good by many as they injected massive sums of money into the troubled banking system. But they might be the ones regretting those moves as they have been getting dismal returns on such investments. Morgan Stanley estimates that the nearly $2.3 trillion dollars under management by these funds have returned -25% in 2008…! Of course, these are major approximations as most of the investments by these funds are done privately, often off markets and these funds usually do not publish any results.

It will be interesting to see how these funds can evolve in the next few years and if pressure from regulators will help generate more transparency for outsiders into what these funds are up to.

More on this topic (What's this?)
NEWSFLASH: Mitt Romney Has Rich "Friends" (Money Morning, 2/2/12)
The New Money Market Fund Rules You Could Face (Money Morning, 2/8/12)
Read more on Mutual Funds at Wikinvest

Even Warren Buffet’s Berkshire Hathaway (BRK.A) is suffering

By: admin | Date posted: 11.10.2008 (4:00 am)

Berkshire Hathaway, the investment fund managed by the famous Warren Buffet announced its results for the 3rd quarter on Friday, not much of a surprise as the fund is diversified compared to many but still very much involved in the finance/insurance sector. Berkshire managed earnings of 682$ per share, a decline of 77% and a fourth straight decline in these quarterly earnings.

Management has said it was possible to look at these results as either a half empty or a half full glass. Berkshire was helped in doing better than the market by the fact that Warren Buffet had set aside important amounts of cash because he claimed to not see any attractive valuations out there. But that is about to change as he has commited, among others, to $27 billions in investments in General Electric and Goldman Sachs, two cases in which the cash stripped companies had to give very attractive terms to the Omaha company. Deals and investments reduced Berkshire’s cash holdings to $33.4 billion on Sept. 30 from $47.1 billion a year earlier

The loss on derivatives comes mostly from a much discussed bet that Warren Buffet made. Basically, Warren Buffet sold Puts on 4 stock indexes that will expire from 2019 to 2027!! So he received that amount that he can now invest and has to put a reserve in case those indexes are under the determined strike at that date. Sounds like an irregular strategy for Buffet who has called derivatives “weapons of financial destruction” in the past, but let’s not judge the Sage of Omaha, he usually knows what he’s doing. “The contracts were entered into with the expectation that amounts ultimately paid to counterparties for actual credit defaults or declines in equity index values [measured at the expiration date of the contract] will be less than the premiums received,” Berkshire said. But some are doing just that. Kyle Bass, managing partner of Hayman Advisors said: “Mr. Buffett has enough money to be able to have his holdings drop 50% and still fly in his jets and live the way in which he has become accustomed,” Bass wrote. “Do you have enough capital to take what you have left, cut it in half, and continue to live the way you have for the past few years? I don’t.”

Another loss came from hurricanes Gustav and Ike, which apparently caused losses in the order of $1.05 billions in the current quarter.

All of these factors explain the 20% or so loss so far this year for Berkshire stock, which has increased in 17 of the past 20 years.

Newer Posts »
 « Older Posts