Archive for May, 2011

Shorting LinkedIn (LNKD)? Are You Crazy?

By: ispeculatornew | Date posted: 05.31.2011 (7:00 am)

After the incredible rally of LinkedIn (LNKD) in the hours and days following its IPO, many, including myself, questioned the valuations used for the company to trade even close to where it currently is. By almost any measure, LinkedIn is vastly overbought and while Facebook has not yet turned public, several other stocks could easily be bought instead. So what would someone like myself, a long & short technology stock trader, do in such a time. If you guessed that I would short LNKD, you would be dead wrong.

I was surprised to read a Wall Street Journal regarding the expensive cost for borrowers of LinkedIn.The cause of course is the huge demand by short sellers. I can easily imagine that many are thinking about shorting the stock. But to find out that so many are doing it? It just seems like such a risky move. Last year, I discussed Research In Motion’s (RIMM) fall and how trying to buy the stock was similar to catching a falling knife. It might work. But trying to time these things is incredible difficult and risky. There are so many less obvious but also less risky trades out there, why would you want to try to pull off the miracle timing?

Don’t get me wrong, it is very tempting. I did make that same mistake last year when I shorted the red hot Baidu (BIDU) which had incredible momentum. It’s just so attractive to see a stock that seems massively overvalued or undervalued.The problem of course is that these things tend to go on further and for longer than anyone could expect. Stocks like Netflix (NFLX) and OpenTable (OPEN) have been shorted massively in recent months without success. Those who considered the stocks overvalued still do to this day but most have been forced to close out their position.

What To Do?

I think the most important thing is to stay out until things calm down. I very well could end up shorting LinkedIn but it probably would not happen in the next few weeks and I would probably wait for technicals to be less strong. Using trend analysis is certainly one way to get this analysis done.

Fees Involved In Long & Short Trading

By: ispeculatornew | Date posted: 05.30.2011 (5:00 am)

A couple of weeks ago, we received a question by email (we always like to receive them,  drop here if you have your own) relating to our long & short trading. The reader has been executing some of our most recent trades and was being hit with a 2.6% annual fee for being short Blue Nile (NILE). He was wondering if those fees were being included in our performance data.  It’s a great question and I should have actually written about this earlier but here it goes. The short answer is NO.

Why Are Fees Not Included In Your Performance?

The most important reason is that those fees are not “significant” and they would be so drastically different from one investor to the other. That being said, I think it’s important for me to explain what those fees are because while it is difficult to publish this data here, it does remain something very important to investors. I will add a link to this post on the page where we publish all of our returns for future reference.

Fees and Revenues Breakdown

The long & short trading that we perform here involves two major types of fees as well as a revenue that you might not realize that you have. Imagine that you perform a trading going Long Apple (AAPL) and Short Blue Nile (NILE). What are the fees involved?

  • Execution Costs: Trading stocks will always cost you but the fee depends largely on which broker you use. Some will charge $30 per trade while others will charge much less than $5. It also depends on the number of shares you are buying. Are these costs significant? It all depends not only on your broker but also on the amount you are trading. How significant is a $5 trading fee when you are trading $10,000? It represents 0.20% (5$ for each side, both on the entry and exit). However, if you are paying more in commissions or are trading a much smaller notional, the trading costs can become more significant.
  • Borrowing Fees: When you short a stock, you must get a prior borrow of that stock from your broker (in the US those rules are fairly strict). Why? Because if you sell a stock that you do not own, how will you deliver them to the buyer? The answer is that your broker will borrow the shares. Those fees are much more significant. The reader was being charged a 2.8% fee to borrow Blue Nile which is certainly significant. The issue of course is that the borrowing costs will be drastically different from one broker to another. You end up paying the borrow cost until you buy back the shares that you shorted. That can end up costing you between 1-5%. I usually stay away from the most expensive names but a stock like Blue Nile will end up being shorted quite a bit (usually with good reason!).
  • Interest on Cash: The other part of that equation is that you receive interest on your cash. Why? Because if you have a $10,000 portfolio and do long & short trades, you will end up with more or less the initial $10,000 in your account (the money cancels itself out in the long & short trades). The hope is that the interest received on that money will be enough to compensate to a large extent for your borrowing fees. Depending on the stocks and the rate that you are receiving that may or may not be the case.

Transparency

It would be very difficult for me to estimate the fees that investors would typically pay on our trading. For that reason, we prefer to present our return “before fees.” We will make sure this is written more explicitly in the future. If I were to estimate the costs, I would say that they should be between 2-3% of your notional at any time which seems reasonable given our current record.

What To Do When Everything Is Overpriced?

By: ispeculatornew | Date posted: 05.27.2011 (5:00 am)

It’s a difficult challenge isn’t it? And no matter who you are and how much money you have to invest, you will run into this situation at some point. Last week, Microsoft (MSFT) announced it was purchasing Skype for $8.5 billion in cash, an aggressive move for the usually conservative Redmond based company. Why? Because by most measures, Microsoft paid a hefty price to purchase Skype. Few have doubts about the possible synergy between Microsoft and Skype or even the Internet phone business that Skype dominates. The entire criticism was based off of one thing; buying an overpriced asset.

Easier To Say Than Do

I would however caution critics to look at the problem that Microsoft was faced with. What do you do if you have tons of cash and, need to generate new business but all deals and possible deals that are being made are being done at expensive, inflated prices? The answer here would obviously be to wait. But for how long? What if you’ve been waiting for a few years now while Google, Apple, Facebook and others continue grabbing assets at increasingly inflated prices? Do you stand on the sidelines? If Microsoft had not purchased Skype, I am convinced that someone else would have paid that price. It can become very challenging to wait. Why? Because at some point, you start to doubt that the deals are actually overpriced. Maybe I’m missing something?

Same Applies To All Bubbles

When house prices, tech stock prices or any other bubble prices kept increasing, many had doubts that the valuations appeared to be exaggerated. Many waited for weeks, months and sometimes even years. At some point however, they often did give up and lost patience.In most cases, they got the worst of both worlds. They got in late so they paid a high price but also ended up enduring the most losses. It’s not an easy problem… it really isn’t.

Buffet Approach

I remember reading Warren Buffet discussing the insurance industry which has a similar problem at times. If competitors are charging premiums that are so little that you consider that matching or beating those prices will end up costing you, what can you do? The choice is either to write some at a loss (although you can always hope that the math was incorrect) or to not do any new business. Buffet has always said he would much prefer the 2nd option which has meant that some of his insurance units got basically no new business for years at a time when pricing became too aggressive. It’s an approach that is much easier said than done of course.

What About You?

I’d love to hear your thoughts on this. Do you blame an executive like Steve Ballmer for possibly overpaying if that was the only way he could use Microsoft’s huge cash  reserves?What would you do if you were about to buy a house but had a gut feeling that was supported by the numbers that prices were overinflated. Would you wait? Could you wait 5 or even 10 years?

Dividend stock analysis: Archer-Daniels-Midland Co (ADM)

By: ispeculatornew | Date posted: 05.26.2011 (5:00 am)

In the past few weeks, we did an analysis of 3 dividend stocks from the oil sector and of JM Smucker (SJM) which turned out to be a great dividend play. All of those companies had made our select group of companies poised for big things in terms of dividend growth. We have reviewed a few in our free mailing list and today we are taking a deeper look at great potential dividend plays based in Canada.

Today, we take a deeper look into Archer Daniels Midland, a conglomerate which transforms cereal grains and oil seeds into food, beverage and all kinds of industrial products. It’s a very big company even though you might have never heard about it. In fact, the company recorded revenues of over $60 billion in 2010. In theory, this kind of business could be very promising as it is not very cyclical, and generally can bring steady cash flows which would hopefully translate into high dividends as well.

No surprises in the fact that we will judge it using the 20 things we look for in dividend stocks.

Dividend Metrics

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When I look at the current dividend yield, it is not amazingly high at 1.69% but is high enough to be considered as a strong dividend stock if the company can rise those consistently. In the past 5 years, the dividend has increased by 10.88% which is certainly significant.

Company Metrics

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The 1 year sales growth number is certainly a bit worrying but I give much more credibility to the 5 year number which is very high and impressive. The P/E ratio is very reasonable and while neither earnings or margins are improving, the payout ratio is very low. However, the debt ratio is a bit higher than I’d like.

Stock Metrics

[table “289” not found /]

Industry Metrics

ADM certainly operates in a relatively good sector, one that is stable and faces limited competition. That being said, the company now also operates in the more uncertain alternative energy business, has had its fair of issues with environment problems and price fixings, etc. It’s not the most reassuring thing in the world.

Overall Impressions

While there are many good elements to ADM, I would end up passing overall because of the high debt level, and its good but not great dividend yield and dividend growth in recent years.

Making Your First 100K Is By Far The Most Difficult

By: ispeculatornew | Date posted: 05.25.2011 (4:00 am)

It’s no mystery why the rich are getting richer in most places around the world. Our whole system is build on the fact that the middle class pays a huge proportion of the fees. That is a fact and I don’t personally get upset about it. It’s something that will be difficult if not impossible to change for several reasons. Because of that, I personally think the key to reaching the passive income lifestyle is to be very aggressive in the early years. As I wrote a few weeks ago, I’m not talking about being overly aggressive in your investments but rather being aggressive in saving money aside, setting up passive income flows, and building your portfolio as quickly as possible. Why? Because every 100K will become easier to build after the first one is done…

Why The First 100K Is So Difficult

There are many things that make it very difficult to get to that first 100K, here are some of them:

Debts: Most that are unable to reach that 100K in net assets have trouble because of debts. Some pay interests on credit cards, loans, credit lines, and in many other ways. Paying back debt is a huge challenge and for many becomes an almost impossible task

Absolute Fees: So many fees are the same no matter how rich or how poor you are such as ATM fees, trading fees, etc. Proportionally, the poor and middle class do not have close to the same amount of money to pay for these fees.

Taxes: In theory, the rich pay a bigger percentage and thus a much bigger absolute amount of taxes. The reality however is that the middle class pays the largest amount of taxes. When you have some resources and a decent salary, you get hit big time. Why? Because you do not make enough to implement the dozens of possible ways to save a lot on taxes.This will NOT change. I understand how some people can get upset about it but these are facts and they will not change. Why? Because you would need virtually all lobby groups and all governments to sign up and it is not going to happen.

Investment Opportunities (mutual funds, real estate, etc): The richer you are, the more options you have in terms of investing. How so? If you have $5000 to invest, what are your options? You will generally get a recommendation for a risk free investment, or a mutual fund that will generally have high fees, etc. These are low quality investments. However, who could blame someone for sending you towards those… It’s not like you can invest in real estate, buy in a hedge fund or build your own portfolio, it’s just not possible. The other aspect of it is that as you become richer, you can sustain more risk all things being equal. That will generally yield you better returns.

Easier to save money: This is not rocket science is it? The more money you make, the easier it becomes to save. The reason? While it’s possible to expand expenses very quickly, generally having higher revenues translates into a higher surplus as well.

Compound Effect: I don’t think I need to do the math or demonstration here. Saving 100K by age 30 or by age 60 will make a world of difference in the end. Just to give you an idea, 100K by age 30 at a 5% return by year would give you up to $432,000 by age 60. That also means that the rich end up making money even while sleeping.

Education: No matter where you live, education is expensive. The more money you have, the more likely you are to have a good education. The correlation between education and income or being rich is incredibly high. Sure, there are tons of exceptions, but as a general rule it is very solid.

-The Rich Receive More: For some reason, the rich always get treated better. Become rich and suddenly people will start inviting you for dinner, you will get free drinks, discounts, etc. It’s not always the case but I would say that as a general rule, it’s accurate.

What It All Means?

I think it becomes very clear that gaining a competitive edge as early as possible is critical. In the end, it will make a world of difference. If the rich are becoming richer, then it is critical to jump on the bandwagon as early as possible.

It’s A Race To 100K

The reality is that as I’ve discussed in the past, I think it’s very important to set ourselves objectives, and plans of action to reach them. In this specific case, I think the initial goal should be to reach 100K of net assets as early as possible.

Does It End After That?

Once that is done, you should be able to reach 200K more quickly, the third one even faster, etc. Whatever it takes, I would focus on that. Things will get easier after that first step

Tech War being taken to a whole other level (MSFT, GOOG, AAPL, NFLX, AMZN, EBAY)

By: ispeculatornew | Date posted: 05.24.2011 (5:00 am)

Companies such as Microsoft (MSFT), Google (GOOG), Facebook, Apple (AAPL), Netflix (NFLX), and Amazon (AMZN) used to all operate fairly quietly in their own fields without making too much noise. They improved their products, worked on improving the user experience and in the end that translated into funding, revenues and profits. Technology being a “growth” sector, these companies have focused on expanding their offering instead of returning their increasing cash reserves to investors. It’s not that difficult to understand why as technology has completely changed what used to be a simple landscape transforming it into a much more complex universe.

First, let’s take a look at these companies 5 years ago or so , be sure to notice that there are basically no conflicts or competing products:

  • Microsoft: Operating System, Software
  • Google: Search
  • Apple: Computers, Portable Music Players (Ipod)
  • Netflix: Movie distribution (DVD)
  • Amazon: Ecommerce
  • Facebook: Social
  • EBay: Auctions

How the world has changed. These days, these companies are increasingly competing on all types of fronts and using their power and influence in order to buy companies, attract the top talent and create their own landscape:

  • Mobile Operating Systems: Google’s Android, Apple’s Iphone OS, Microsoft’s Windows Mobile
  • Software: Microsoft, Google, Apple
  • Movie Rentals: Streaming on Netflix, Amazon, Google’s Youtube, Apple’s Itunes
  • Mobile Apps: Google (through its Android store), Apple (control through Itunes), Amazon (Android stores), eBay
  • Telecommunications: Microsoft (through its recent Skype purchase), Google (Google voice and Android), Apple (iPhone)
  • Social: Facebook remains dominant with Google and Apple doing their best to compete
  • Display ads: Google, Facebook, AOL, Yahoo
  • Search: Google, Facebook, Microsoft (Bing), Apple (through Itunes), Twitter
  • Cloud computing: Microsoft, Google,, Apple, Amazon
  • ECommerce: Amazon, eBay, Google (through checkout), Facebook (increasingly thanks to credits, etc)
  • Electronic Payments: eBay’s Paypal, Facebook Credits
  • Online Music: Apple’s Itunes, Amazon, Google’s music store

So what has changed? I would say thatthe landscape has gotten much more complex and competitive. Perhaps the three remaining dominant companies are Google in search, Apple in music and Facebook in social but even those are not as dominant as what we could see only a few years ago. Is it a good thing for these companies? I think one of the best examples is Netflix. Facing increasing competition from Apple, Amazon and even Google’s YouTube will certainly affect its future growth, pricing power and negotiation power with the studios. Those studios want to avoid losing power like the RIAA did with Apple. All of those factors will directly affect Netflix’s P/E ratio and thus its stock price.  Companies will all try to continue building the equivalent of an Apple world.

It also means that before investing in a company, we must consider the competition and how likely it is to affect short to medium term growth.

What are your thoughts on this more complex tech universe?

Outlook for Silver & Gold

By: ispeculatornew | Date posted: 05.23.2011 (5:00 am)

A lot of investors are keeping a very close eye on precious metal futures and in particular silver is drawing a lot of attention. I did write about trading those commodities 10 days or so ago. In the last two weeks Silver has been beat up pretty badly; its price has dropped about 34% from its peak on April 28 to $49.56 an ounce to its low on May 12 at $32.30 an ounce.

Despite its drop, I actually still like the silver market. Looking at the chart we can see that the recent rise was extremely parabolic and as Newton would say: “whatever goes up must come down,” and the market is no different. If you managed to jump on silver futures in February then congratulations but the reality is, its rally was unsustainable.  When the excitement ran its course, sellers jumped into the market and drove the price down.

This drop in the market has provided a reset and I think it is only a matter of time before prices move higher again; however until I get the right signal I wouldn’t touch a contract with a 10 foot pole. These resets provide great opportunities for investors who missed the initial rally.

Let’s look at the recent price in gold as an example of how investors could have taken advantage of a price recent. In March 2008 gold broke above $1,000 an ounce for the first time ever. However by October, the price hit a low of 691.80. That represented a drop of about 30% in seven months.

However volume picked up and broke initial resistance at $800. During 2009 the price quickly regained all of its lost territory. Despite the drop, a lot of analysts remained extremely bullish on gold and it looks like their long-term outlook was right. Gold has managed to hold on to most of its recent gains and is trading around $1,400 an ounce.

Silver prices are extremely more volatile than gold but the trend remains the same.  I think it is only a matter of time before silver moves higher; however, in the short-term silver prices have only one way to go and that is down.

I am not the only one who is sitting on the sidelines waiting out this volatile storm. A lot of analysts have said they are just waiting for the right time to jump back into this market. The most important element investors should be looking at right now is the volume down at the bottom of the chart. Volume dictates the price trend and right now there are way more sellers than buyers in this marketplace.

There appears to be initial support at $32.00 an ounce but I don’t think it will prove to be very strong. I think we could see prices drop to at least $30.00 an ounce before this storm is over.

On the upside, there is strong resistance at $40.00 an ounce and if prices are going to break that level, volume will have to be extremely strong.

Commodity prices across the board are expected to move higher over the next few years. Whether this will be another speculative bubble is not really my concern. I am more interested in finding the right entry point and then getting out with some nice profits.

Financial Ramblings

By: ispeculatornew | Date posted: 05.21.2011 (6:21 am)

It was a crazy week with LinkedIn (LNKD) going public. We actually wrote about it 2 times including the impacts of the IPO on Facebook’s value. It was an interesting week but with the good weather, I’m heading outside, so here are some good links for the weekend 🙂

Dividend dad – reinvesting and RESP @ TheDividendGuyBlog
Is Facebook the next MySpace @ Gigaom
Yup, P/E ratio does matter @ ValuePlays
S&P Lowers Italy outlook to negative @ ZeroHedge
In 5 years, my online company will… @ The Financial Blogger
What you get when you buy Yoku @ StoneStreetAdvisers
OPEC by the numbers @ Mint
Novartis Dividend Analysis @ Dividend Monk
Socially responsible dividend stocks @ WhatIsDividend
Fixed lifetime annuities and fees @ ObliviousInvestor
What to do when you fluke a CFA mock exam @ SmartFinancialAnalyst

Now that Linked (LNKD) is worth $9B… Facebook is worth…??

By: ispeculatornew | Date posted: 05.20.2011 (4:00 am)

Earlier this week, I wrote about LinkedIn’s (LNKD) IPO, expressed some doubts about its valuation as a $4B company. Needless to say that at this point, anyone who bought LinkedIn at its 45$ per share IPO price made a killing. In fact, they more than doubled their money as the stock opened near 83$ but quickly reached $100 and beyond before ending the day at 94.25$. That sets LinkedIn at a valuation of close to $9 billion. High? That’s an understatement as the company made Earnings per share of $0.07 per share last year. Estimates are for earnings of $0.28 in the next 12 months. That sets LinkedIn at a forward P/E over 400, much more expensive than any other stock on our radar (and apparently more than any other stock in the US too).

Excessive valuation?

I think it’s fair to say that many consider LinkedIn’s price to be well beyond anything reasonable. The problem in finding a fair price value is mainly that estimates of both revenues and profits differ so much from one person to the next. From what Henry Blodget of Clusterstock said, estimates for 2012 range from:

Revenues: $576-$900M
EPS: $0.15-$0.75

And for 2013:

Revenues: $750M-$1.5B
EPS: $0.60-$1.50

In order to establish the facts, let’s start with the more optimistic views, which are certainly possible in my opinion. If EPS could be of $0.75 next year, it’s current price of 94$ would imply a P/E for 2012 of over 125. That seems very high.I would certainly consider it possible for LinkedIn to reach those numbers but even if it did, a stock growing at 100% would still hardly justify a forward P/E that high. Could growth accelerate? I think it could and there lies the big problem in shorting a stock like LinkedIn. Not only are buyers not as rational about valuations but it’s very possible that the underlying revenues and profits could jump more than expected as the company becomes a bigger name.

Now back to Facebook

I have not received any emails ot tweets about it but I’m certain that by now, some of you are tired of hearing me talk up Facebook. I’ve said that at a $70B valuation, it was the best deal out there. I’ve also expressed my frustration for being unable to join in on the secondary market action on Facebook. In light of today’s action, I fear that investors will realize a few things, not only about LinkedIn, but about Facebook. If LinkedIn is trading at a $9B valuation, how much is a much bigger, much more important social network worth? Just to recap, Facebook is expected to earn $2 billion in profits this year on revenues of close to $4 billion. The company is growing at a similar pace as LinkedIn. 10 days ago, I had discussed a valuation of $150-200B but in the light of yesterday’s jump in LinkedIn, that might be conservative.

If I assume that Facebook will make over $3B next year, and that it trades at a much cheaper P/E of 100, that would set the market cap of $300B!!!! You did read it right. I’m not saying that I would buy Facebook at such a valuation but I’d certainly jump at any opportunity to go Long on Facebook against Short LinkedIn (LNKD) at current valuations. It will not happen of course and there would certainly be some degree of risk in such a trade but it seems like a no-brainer that Facebook is very cheap at current valuations.

Do you have any thoughts?


Disclosure: No positions on LinkedIn or Facebook

The JM Smucker Co (SJM) Dividend Analysis

By: ispeculatornew | Date posted: 05.19.2011 (5:00 am)

Last week, we did an analysis of 3 dividend stocks from the oil sector. All 3 of those companies had made our select group of companies poised for big things in terms of dividend growth. We have reviewed a few in our free mailing list and today we are taking a deeper look at another one. A company that I have to admit not knowing prior to this analysis so I was certainly surprised to see it come up with such great numbers. Could it turn out to be an even better pick than the oil stocks?

I did find a few good things about the company while researching it. Some of the company’s brands such as Folger’s coffee, Robin Hood Flour or Crisco oil are solid brands. I did not know that Smuckers was behind these products. Also, the fact that it has been doing business since 1897 is a great sign of stability which is one of the things we’re looking for when looking for long term passive income. The stock has been paying dividends since 2002 is certainly not as much as some other names that we have but good enough to be looked into. No surprises in the fact that we will judge it using the 20 things we look for in dividend stocks.

Dividend Metrics

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Even compared to the solid names we’ve been looking at, SJM’s dividend profile is very strong. Its dividend yield of 2.64% is very strong and both the 1 year and 5 year growth is very solid. It certainly looks like a very solid dividend play if the company can keep up the growth.

Company Metrics

[table “285” not found /]

Wow, every single number in this table looks like a winner. The company has high sales growth, earnings growth, a very reasonable P/E ratio, improving margins, a low payout ratio and almost no debt.

Stock Metrics

[table “286” not found /]

Industry Metrics

Food sector companies usually make very good dividend plays. Why? No matter how the economy reacts, they are generally able to keep up stable growth, constant margins that bring the company earnings, cash flow and in the end that translates into good dividends. The competition is present but choosing strong brands usually gives me confidence that it can be kept up.

Overall Impressions

This is a clear cut decision. All signs point to the same direction; Smuckers is a great company and the perfect dividend play both for the short and long term. I would assume that the company will be able to increase its payout significantly over the next 5 to 10 years