Archive for May, 2013

Weekend Readings

By: ispeculatornew | Date posted: 05.31.2013 (3:00 am)

Have you ever heard of Reddit? It’s an amazing community/website and I’m always stunned at what I see over there. This story is just one example.. the power of Reddit! Very impressive stuff! Anyway, here are some good readings before starting your weekend.

General Readings

Can Japan export its way to a recovery? @ EconBrowser
If cable is dying, why is it making so much money? @ Atlantic

Dividend & Passive Income Readings

Stock squeeze! Look for the money to invest now @ TheDividendGuyBlog
How Warren Buffett made his fortune @ DividendGrowthInvestor

Tech Stock Readings

The race to a smart tv is over, Xbox won @ PandoDaily
Facebook IPO one year later, what really happened? @ Atlantic

Time For A Fresh Look At Facebook ($FB)

By: ispeculatornew | Date posted: 05.30.2013 (3:00 am)

A few months ago, I put money into Facebook, buying at $19.99. I had made my case for owning Facebook over and over and would have been paid the IPO price. I didn’t though. I try to stay away from IPO’s. It’s too volatile, too risky. Instead, I waited a while and once the price seemed more stable, I purchased. There are many reasons why I was bullish on Facebook and I did start off doing very well with the trade. I was up 40% or so a few months later and things seemed promising on many fronts.

The Mood On Facebook Has Changed

These days though, the news is not as exciting for Facebook shareholders. The stock is down to $23.55 and there are many reasons to question the social network. I have not considered selling and doubt it will be the case today as this is a very long term pick. I do look at such stocks every few months to make sure they still make sense and adjust my position if needed.

FB

Points Of Concern

zuckFacebook’s Status As The Leading Social Network: You could certainly argue that Facebook is not as dominant as it once was. Some will say that it’s because teens and others are getting tired of Facebook which is true. I would also argue that a big reason is simply the fact the fragmentation of social networks. Facebook, LinkedIn, Google+, Twitter, Tumblr, Instagram, Pinterest, etc. Increasingly we are using different social networks in different ways. As Sherly Sandberg said yesterday at D11, “Teenagers are using other things more. At the same time, they continue to very active, engaged Facebook users”. Is it bad news if Facebook continues to be the leader in an exploding market? I did write about the fact that Facebook might be forced into more acquisitions similar to Instagram. In fact, you could argue that it should have outbid Yahoo for Tumblr.

I think it’s also fair to say that while Google+ is no Facebook, it has done much better than I had anticipated. It remains relevant and perhaps increasingly so. Google is truly committed to making Google+ a critical part of its product offering and while I don’t see it as a threat yet, it’s not great news either.

Overall User Growth: Yes, user growth has slowed but even when I made my initial case for Facebook, I never argued that user growth would be a driver of earnings. It would be a bad sign if things slowed down significantly but slower growth is more than fine with me. After all, there’s not as much space for growth left once you reach 1 billion users. What I pay much more attention to is how much time users spend on Facebook and in that regards, metrics remain incredibly strong so not a big source of worry to me.

Transition To Mobile: Many argued that Facebook had a major problem because its users were increasingly accessing the network through mobile. I never got that. Yes, it created a short term challenge because those banner ads don’t work in the same way. Is that a challenge? Maybe. But having hundreds of millions of users accessing your site when they have free time is a good thing. Facebook has made a smooth transition and a growing portion of its earnings comes from mobile ads, mostly in the newsfeed. The negative feedback has been fairly limited.

A much more disappointing fact has been the whole Facebook Home fiasco. I do get that it’s just a start and that Facebook will likely improve its product in the coming months. You do only get one chance to make a good first impression and it’s safe to say that for Facebook and its first mobile operating system, it’s been a failure no matter how you look at it (ratings, reviews, downloads, etc). The only positive I see is that I did not even expect such a product to be released so needless to say that I was not “let down”. It is still a negative though because it does affect the perception of Facebook.

Revenue Sources Diversification: This is by far the most disappointing aspect so far. From the start, I’ve said that Facebook’s future and potential did not depend on advertising. I believed other sources such as ecommerce, virtual currencies, and others could end up making an incredible difference in how much it can make per user. There have been very few signs of this happening. Yes, Facebook does offer users the opportunity to buy physical gifts but that is not nearly enough. I have not heard much about this either from Mark Zuckerberg.. are such ideas not being worked on?

Facebook Continues To Have Potential

I’m a bit more skeptical about Facebook’s upside potential than I was a year ago but I do think the potential remains there and do believe that being long makes a lot of sense. I will continue to monitor and adjust if needed and will of course keep you posted.

Disclaimer: Long Facebook ($FB)

Balancing Stock Upside And Downside

By: ispeculatornew | Date posted: 05.29.2013 (3:00 am)
balance1A fellow blogger emailed me asking for more details about my “upside” and “downside” analysis. I often discuss those 2 factors when I make stock picks and they are a critical part of my stock analysis. It’s not as easy to explain how I use them compared to other factors such as a P/E ratio for example. I’ll still give it a try today. Basically, I feel like every stock has a profile that can be defined among other things as upside and downside.
I Define Upside As Being…The odds that either a company’s business or the way it is perceived by the market changes in a significant way. There are many different ways and I must judge the probability of each event:
Tech World:
Amazon (AMZN): I’m a big believer in Amazon and I’ve explained why. The company is taking over ecommerce and dominating new sectors every year. It trades at a high P/E on the hopes that it will eventually focus more on profits and less on increasing market share. If that does end up happening and earnings start to increase, Amazon could end up moving significantly higher. It has a distribution infrastructure unlike anyone else and could easily increase profits at high growth rates.
Dividend World:
Apple (AAPL): Apple has been going through difficult times and the stock is down big over the past 12 months. The company is still profitable, growing revenues and profits and there are rumors that new products are in the pipeline. If ever an Apple TV made its way into Apple shows, it could be very significant to Apple’s bottom line. At its current P/E, Apple could see a major increase. If you’re investing in Apple as a dividend stock, the fact that it has tons of money, and billions coming in every single quarter likely means many more dividend hikes.
I Define Downside As Being: Odds that a company’s stock or business will suffer a significant blow that could mean big losses as a shareholder, there are many examples:
Amazon (AMZN): As you can imagine, the reason why I’m still on the sidelines on Amazon despite the high upside is the very high downside. It trades at a P/E of 200, has little to no profits and very little growth. Yes, there is that promise of future profits. But if investors start to lose faith in that happening, there is no doubt that the stock could be down BIG. That is scary and I don’t think any Amazon investor could ignore that possibility.

In An Ideal World…

In an ideal world, I’d go for stocks that have high upside and low downside but I rarely see those. When I do, I jump on them and am not afraid to bet a bit more as I did recently going long Apple (AAPL). What I do however is I try to stay away from trades that have too much downside risk. As much as I like a company like OpenTable (OPEN) and believe in its long term future, there are many types of events (competition from the likes of Google & Facebook, slowing growth, etc) that make the downside risk too significant.
I’m not against taking risk. I am fully aware of the risk involved in holding Facebook (FB) for example but I do think the upside makes the trade worth it. It’s all about balancing both sides.

How do you balance upside and downside when you try to value stocks?

Not All Passive Income Flows Are Made Equal

By: ispeculatornew | Date posted: 05.28.2013 (3:00 am)

In my quest to become financially independent as quickly as possible, I’ve been looking into many different types of passive income. Why? Because I’m trying to make sure that I depend as little as possible on having a full time job, on promises such as my government pensions, etc. I’m far from alone and I’m guessing that many of you are trying to do the exact same thing.

One dangerous thing to do though is simply trying to categorize every flow into 2 categories: passive or not.

It’s Not Black And White

Obviously, working a full time job where I get paid for every hour that I work is 0% passive right? The opposite might be having an annuity or pension that is paying me money every month, no matter what happens. That would be considered 100% passive.

I would argue that most income flows are somewhere in between. Investment cash flows (such as dividends) are very close to being 100% passive but they do require some work in re-balancing and monitoring the position.

My online company that generates a decent amount of money every month is also quite passive. But if stopped looking at my websites, writing on this blog, paying writers, renewing my domain names, etc. The income that is generated would gradually decrease and eventually become a fraction of what it is today.

I’ve also discussed ideas such as owning real estate which I plan on doing in the future. Again, I know several owners that rent out condos or houses but take little to no care of their buildings. The income remains but over time if renovations are not taken care of, good tenants found, etc.. that income can also dwindle.

So Does Passive Income Actually Exist?

I would argue that we should strive to make our income as “passive as possible”. It will likely never be completely hands off but if over time I’m able to:

-Have more employees in my web business and focus on things I enjoy that require less time.
-Have a fairly automated or simple process to manage my investments (or in some cases hire someone to do it)
-Have someone that can do most of the work on my buildings, collect rents, etc

I think it’s safe to say that my goal is not only to increase my passive income and make it as diversified as possible but also to try to make that income as passive as possible over the years.

New Trade: Long Google ($GOOG) & Short Demand Media ($DMD)

By: ispeculatornew | Date posted: 05.27.2013 (3:00 am)

Today I’m thrilled to open a trade that I could easily do on a much longer time horizon. I don’t think you could possibly compare these 2 stocks. Just take a look at their recent growth profiles:

DMD Revenue Quarterly YoY Growth Chart

DMD Revenue Quarterly YoY Growth data by YCharts

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

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googLong Google (GOOG)

I’m increasingly convinced that Google’s “cloud advantage” will turn out to be a major factor in how the next few years play out. Google is able to build off of its products, information to produce vastly superior products. That and strong leadership by Larry Page have been key factors in Google being to able maintain strong growth and I do expect that to continue. I do think Google is attractive at these prices, especially when you compare it to a company such as Demand Media.

GOOG

Next earnings release: July 19 2013

Short Demand Media (DMD)

I struggle to believe in Demand Media as a sustainable company. Its business is building websites that provide useful information about just about anything you can think of (just take a look at eHow.com). Yes, those are solid websites but it’s also a model that is extremely competitive, that depends on advertising and that depends on Google for its traffic. Not a great place to be in my opinion. So seeing this company which has little to no long term edge over competitors such as Yahoo (YHOO) and AOL (AOL) trading at a comparable P/E to Google’s makes no sense to me.

DMD

 

Next earnings release: Aug 7 2013

Disclaimer: No current position on Google (GOOG) or Demand Media (DMD) but I will be opening this trade Monday morning

 

Weekend Readings

By: ispeculatornew | Date posted: 05.24.2013 (3:00 am)

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

Is Yahoo (YHOO) The Next Japan Trade?

By: ispeculatornew | Date posted: 05.23.2013 (3:00 am)

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_jan07New 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)

Dividend Yield on Cost Is Irrelevant

By: ispeculatornew | Date posted: 05.22.2013 (3:00 am)

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?

About Those Tax Havens

By: ispeculatornew | Date posted: 05.21.2013 (3:00 am)

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

 

Time To Start Investing On Margin?

By: ispeculatornew | Date posted: 05.21.2013 (3:00 am)

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?