Archive for August, 2010

Top 50 ETF’s – September 2010 edition

By: ispeculatornew | Date posted: 08.31.2010 (4:22 pm)

In what turned out to be the worst month of August in over a decade, bear ETF’s, funds that are built in order to profit from market downturns were at the top of the ranks. These funds and especially the leveraged short ones dominated the charts with Direxion and Proshares sharing the lead.

The other successful bet was the long treasury (TMF) which is essentially the same bet as a poor performance of the equity markets usually translates into strong performance of the treasuries.

Other bets that did well are:

-Short oil (DTO)
-Long Gold Miners (GDXJ)
-Long Global Carbon (GRN)

The one big surprise for me was not seeing a volatility ETF make the top 50 as they usually perform very well in such difficult environments.

And a few other commoditiy plays also did very well. Will these be winners in September? Difficult to say but most of the winners in August are still down for the year.

Without further wait, here are the top 50 ETF’s in August 2010:

[table “167” not found /]

Quick news – August 31 2010

By: ispeculatornew | Date posted: 08.31.2010 (2:55 pm)

Tech news: (concern the stocks we follow)

Apple (AAPL) is said to be about to announce that it will include a Netflix (NFLX) service in its next tv box
AOL (AOL) just acquired mobile firm  “Rally up”
Rackspace (RAX) was cut to “hold” by Benchmark
Staples announced it would soon be selling the Amazon (AMZN) Kindle in its stores
Google (GOOG) released a “smart sorter” in its Gmail section that performs “smart” email sorting
Google (GOOG) & AP reached a distribution deal

Best return:    Quinstreet (QNST) +2,19%

Worst return:    Research in Motion (RIMM) -6,02%

Getting ready to short Travelzoo (TZOO)

By: ispeculatornew | Date posted: 08.31.2010 (7:01 am)

Have you taken a look at the charts of travel internet company Travelzoo (TZOO) in the past few days? Not as crazy as investors in 3Par or other acquisition targets but it remains impressive to see how much the stock has gained in recent action.

Monday I could not open a new trade because I still have 5 live trades but one stock that was discussed in the Premium Newsletter last weekend was Travelzoo. I would not go short a stock that gained over 25% in a couple of days to a avoid being against such strong momentum but it would certainly make sense to strongly consider shorting the stock when things will calm down a little. I have shorted Travelzoo against Priceline earlier this year with great success mostly because valuations were not consistent with a stock that has not generated that much growth in recent years. So why does it trade so high? Because for some investors Travelzoo shareholders are easily excitable.

It happened again

The odd thing about the recent rise is that there wasn’t anything “material” behind it. The main factor that contributed to Travelzoo’s rise was an announcement that it would start offering a “Groupon” like service. What is Groupon? It has been at the centre of a lot of hype in recent weeks as it gains a lot of traction similar to what Facebook & Twitter experienced after a few months. You can visit the website if you’ve never heard of it but basically it gives out coupons targetted to where users live. The concept is simple but brilliant and has been generating copycats everywhere.

Travelzoo will certainly be able to generate business by using the concept but will it be enough to justify a 25% increase? Not likely I would say. They do have millions of emails and will certainly put effort into getting more info about the subscribers such as the city they live in, but so do competitors such as Expedia (EXPE) and Priceline (PCLN)

Apple (AAPL) shareholders, consider buying insurance on Steve Jobs

By: ispeculatornew | Date posted: 08.31.2010 (4:00 am)

Hedging any investment, when it is not too expensive is certainly a very attractive proposition. There are conventional ways of doing so, through options for example, but also less conventional ways.

In case you did not follow this news, HP (HPQ), the giant pc/printer company suffered a huge loss in recent weeks when the board fired Mark Huard because of a sexual harassment complaint. The board has been accused of acting too quickly without putting enough effort into finding out what had really happened. To this day, many aspects of the dismissal remain unclear but what is clear is that:

-Both Huard and the board made important mistakes
-Shareholders are the ones that assumed the biggest loss

Just take a look at the chart of HPQ in the days following Huard’s firing:

Why did the stock suffer so much after losing just one guy? Because Huard had been at the head of HP during a great turnaround and has been seen as crucial in the recovery of the tech company. Now, can you tell me of the one company where the CEO stepping down would draw a major loss for shareholders? Steve Jobs from Apple comes out heads and shoulders above everyone else. Not only is he seen as the man who rescued the company a decade or so ago. Jobs also did have major involvment in the launch of huge hits such as the Ipod, Iphone and the recent launch of the Ipad. If you recall,  the stock became very volatile 1-2 years ago when rumors surfaced that Jobs was still suffering from health problems and might not be able to continue his work at Apple.

Can you imagine if Steve Jobs did have to quit his job at Apple?

No matter what the reason, it’s easy to imagine several billions of market cap being wiped out in the hours following such an announcement and if you have a portion of your retirement fund stacked with Apple shares, it might be something you should consider protecting from… but how?

Insurance?

I was wondering if buying life insurance on Steve Jobs would be possible for the average shareholder. Wikipedia seems to indicate that it’s a possibility. Turns out it’s not. You can read about it and a funny story regarding life insurance bought on strangers here. There might be some local laws that permit such a purchase? If so, please let me know.

Another option might be looking into making such a wager through event trading on a site like InTrade.

Any other ideas?

Of course, this article is a bit of an exageration as it’s probably not worthwhile to actually get insurance on such an event from non-conventional sources but I thought it was an interesting idea and could certainly

Quick news – August 30 2010

By: ispeculatornew | Date posted: 08.30.2010 (7:55 pm)

Tech news: (concern the stocks we follow)

Google (GOOG) acquired socialdeck
Google (GOOG) has acquired Angstro a startup social network

Best return:   Travelzoo (TZOO) +2,23%



Worst return:   Dice Holdings (DHX) -8,85%

HP (HPQ) & Dell (DELL) playing high stakes poker over 3Par (PAR)

By: ispeculatornew | Date posted: 08.30.2010 (4:00 am)

I often get questions when takeover bids are made. “If BHP made an offer to buy Potash for 130$ per share, why would the stock move to $150?

I think we got the perfect example to explain why. It all started when Dell (DELL) made an offer for a little known company, 3Par (PAR). It offered 18$ per share, a very generous offer considering that PAR’s stock was worth less than 10$. You can imagine what happened. 3Par management accepted the offer and it went through, right? Wrong in fact. They did accept the offer but there was speculation that Oracle would make a bid of its own as tech companies with loads of cash look for growth opportunities. A stock that receives an offer for X dollars might move higher simply because investors expect another, higher bid to be made by either the same company or a competitor.

Turns out that HP (HPQ) was the one to make the move as it made a counter-offer for 24$ per share, a big premium over Dell’s offer. And that is when PAR shareholders understood they had the best position of all… their shares were being auctioned off between two tech giants, Dell and HP.

Since that day, both companies have bids, counter-bids and it is still unclear how things will end. On Friday, Dell made another big raise, making an offer of 27$ per share, which HP raised a couple of hours later when it offered 30$. Where will this all end? Unclear but the stock traded over 32$ on Friday fueling speculation that the bidding is not over just yet.

How high could it go?

It’s difficult to say as both companies are already paying a premium of over 200% at this point and while they do have lots of free cash, at some point you would think that one of them will give up. What is clear is that the big winner here will not be Dell or HP but rather 3Par shareholders with a return of over 200% in a couple of weeks. And if anyone was short 3Par? Well as we discussed last week, shorting a stock that is an acquisition target can be costly, especially when the stock goes up so much. Luckily, on such a small stock, there were probably very very few short sellers!

Quick news – August 28 2010

By: ispeculatornew | Date posted: 08.28.2010 (5:10 am)

Tech news: (concern the stocks we follow)

Dell (DELL) made a new offer of 27$ per share for 3Par (PAR) but HP (HPQ) replied with an offer of 30$

Best return:   Travelzoo (TZOO) +15,08%



Worst return:   Research in Motion (RIMM) -1,81%

Back to the basics: the P/E ratio

By: ispeculatornew | Date posted: 08.27.2010 (5:00 am)

In the newsletter that we sent last week, we asked readers for suggestions and questions and one recurring theme was that it would be nice to review some more basic concepts so I thought one of the best ones to start with would be the P/E ratio or Price/Earnings. Why? Because it is one and perhaps the criteria that I use most when selecting stocks or to evaluate valuations but I have never given a good explanation of what it is, what it represents, etc.

What is it? Lemonade stand example

Up to this point, I have written assuming that readers are familiar with the P/E ratio but the fact is that it’s not the easiest concept and I think going back to an easier example would be a great way to better understand it.

Is there a lemonade stand or store near your house? Imagine that the workers at the stand are paid on a daily basis and do not get “profits”, for simplicity purposes. If the lemonade stand has been making 100$ per year for 10-20 years, you can probably assume that it will remain the case in the future right? How much would you be willing to pay to own the stand and the profits? If you consider that a 10% return would be good enough, you would be willing to pay 1000$ for the stand.

In this example, the price paid (1000$) is 10 times higher than the annual profits so the P/E ratio would be 10 (1000$/100$). Makes sense?

Different types

In the previous example, the lemonade stand is generating the same profits year after year. But imagine if the stand has been and continues to generate growth of 10%. You could expect profits for next year to 110$. In that case, the 1000$ price for the business would represent a  9.1 P/E ratio. This would be the “Next Year’s P/E ratio“.

How important is growth when comparing P/E’s?

Obviously, growth is crucial when looking at P/E ratios. Why? To go back to our example, it’s easy to see how the stand that can increase its profits by 10% per year will make a huge difference over a few years.. After 5 years, that business would be generating over 160$ of annual profits. Obviously, if you paid 1000$, the return of 160$ per year would be significant. That is why it is critical to consider growth when comparing the P/E ratios of different companies. I spend a lot of time comparing P/E ratios of different companies but if you are not taking into account differences in growth, there really is no sense in even doing the exercise.

Downsides to using P/E

Of course, using a P/E ratio has its flaws, here are a few:

-If the lemonade stand is making no profits or actually losing money, it becomes very tricky to use P/E ratios. The best way to do it is to project profits for next year or two years from now, then compare those ratios but it remains a imprecise science
Does not consider earnings quality. When companies have “one time” items that can affect the “Earnings Per Share”. If those earnings will not repeat in the future, it can become difficult…
Does not consider the assets and debt of the company. I’ve been looking into ways to better include this in my stock picking. A company like Yahoo has little earnings and honestly I do not see that changing much in the future. But if the company has billions of dollars in the bank, or if it had huge debt, it should be considered obviously but a P/E ratio would not be able to do that.

Why I still use it so much

I agree, I could never trade only with a P/E ratio but:

1-I still think it’s one of the best ways to compare valuations of companies, which is critical in long/short trading.
2-Once you add growth and assets & debt, you can get a very strong feeling of a company’s valuations and value
3- I think that over time, you can learn which companies are reliable in terms of P/E ratio and which ones are too volatile

Where to find it?

The best place to find P/E ratios is on Google Finance or similar wwebsites. Here is a screenshot:

You will not get “Forward looking P/E’s” easily since they depend on future earnings estimates.

Is China all hype? How to play it?

By: ispeculatornew | Date posted: 08.26.2010 (5:31 am)

You’ve probably heard it 100 times already, China is now officially the 2nd biggest economy in the world after surpassing Japan earlier in the month. It was a huge milestone of course and China now moves to its next objective; passing the United States as the top world economy. It is of course very far from that goal but few argue that it will succeed even if it takes a few decades to get there. China remains contested by most Westerners for its good and its bad but one thing that is very clear is that many opportunities exist for investors ready to get involved in China either as Long or Short investors.

How could the Chinese economy be a good short? Simply because of all the hype surrounding China which has attracted loads of money into the country and hiked asset (and stock) prices. Did it go too high too fast? Some are betting that it did in particular in the real estate business. The big question of course remains what China’s economy’s fair value is, how fast all of this growth will happen and how will the Chinese economy and political system look 10 or 20 years from now.

Obviously, these are big questions and I could probably spend one year on the question but I’ll try to be brief to be able to present you the top ways to play China right now.

Why China is the next big thing

Some say that China will never rival the US in terms of capital markets even if its economy does evetually surpass America’s. Things are changing fast however and doubters should pay attention. A few days ago, McDonald’s became the first foreign company to issue debt in Hong Kong, in Chinese Yuan. This paves the way to other multinational companies that will want to issue debt and also become listed on Chinese equity markets. “This is going to be a popular trend.” Said Donald Straszheim, a head of China research at International Strategy & Investment Group.

The Chinese government is doing its best by deregulating the industry to help the companies. It will of course give greater exposure and visibility not only to China but to the Yuan.

Maybe it’s not

For all its growth and the fact that it is now the world #2 economy, it’s important to remember just how far China really is right now. It did just pass Japan in total GDP but its GPD per capita (per person) is about 10 times lower than Japan. And you can imagine how far it is from US GDP per capita. China has tons of work left to give its citizens access to basic infrastructure.

Another criticism that we often hear is China’s currency manipulation in refusing to let the Yuan rise. That helps the economy generate higher exports and as the government is gradually moving the Yuan towards a “free floated” currency, some argue that growth might decelerate as that happens.

Many of the economic and financial data points generate a lot of criticism and doubts as the Chinese government is far from transparent leading many to believe that the economic puicture and social problems are much greater than we are led to believe.

Plays on China

Wheather you are a bull or a bear on China, there are many opportunities for investors in what is quickly becomming a new major world financial hub. We decided to take a deeper look into many of the plays that can currently be made on China through ETF’s and a few individual stocks. We concentrated on US listed securities since many of the largest Chinese companies are listed as ADR’s on US exchanges anyway.

Straight up

If you want to play the Chinese markets as a whole, you have a few very good options that have been around for a long time and sustained a solid track record . There are many slight different ETF’s but the biggest by far is FXI. Since the fees are roughly the same on each of them, I would stick to FXI for now.

[table “163” not found /]

Currency

The Chinese Yuan is certainly one of the most interesting currencies in the world thanks to speculation about government revaluations. The only persons that actually know what will happen are part of the Chinese government but you can be part of the winners when that happens thanks to these 2 ETF’s.

[table “166” not found /]

Sectors

There is speculation about the explosion in economic activity but also bubbles in many different sectors of the Chinese economy. You can now make a very precise investment on a specific sector of the Chinese economy.

[table “165” not found /]

Leveraged & Inverse Plays

[table “164” not found /]

Quick news – August 25 2010

By: ispeculatornew | Date posted: 08.25.2010 (4:46 pm)

Tech news: (concern the stocks we follow)

Research in Motion (RIMM) cut to “hold” by GMP
Google (GOOG) is testing voice calling through its “Gmail” email

Best return:   Rackspace (RAX) +5,11%

Worst return:   NetEase (NTES) -1,93%

Research in Motion (RIMM) cut to “hold” by GMP
Google (GOOG) is testing voice calling through its “Gmail” email

Best return: Rackspace (RAX) +5,11%
Worst return: NetEase (NTES) -1,93%