Archive for June, 2010

Quick News – June 24 2010

By: ispeculatornew | Date posted: 06.24.2010 (2:21 pm)


Research in Motion (RIMM) announced earnings of $1.38/share beating estimates of $1.34 but failed to beat revenue estimates ($4.24B vs $4.35B)
CTrip (CTRP) rated as “Buy” by Brean Murray
Microsoft (MSFT) rated as “Hold” by BGC Partners
Dell (DELL) expects revenues to rise between 14-19% in 2011
Baidu (BIDU) was downgraded to “Long-term Buy” by BOCOM International

Top Winner: The Knot (KNOT) +3,44%

Top Loser: Expedia (EXPE) -4.11%

Buying domains/websites = buying cheap land/real estate?

By: ispeculatornew | Date posted: 06.24.2010 (4:05 am)

New investing landscape

If you have paid attention to business news in the past few months, you will notice that many big players are investing into internet properties. Sometimes it’s about a name, other times it’s about traffic, revenues and sometimes even profits. Big names like Yahoo (YHOO), AOL (AOL) and IAC Interactive (IACI) have been loading up putting huge amounts of cash into this new virtual world. Many investors and even the population in general have trouble understanding why so many of these transactions are taking place. Why would a major company put so much money into something that is 100% virtual? I decided to do a comparison to start off the discussion!

Traditional business/land

Think of a traditional land owner or rental property owner or even those business men that own multiple small businesses. These have been around for hundreds of years and they are a lot more easy to understand.

Buying land or a residential/commercial property: In this case, an investor is putting up a decent amount of money in order to get future cash flows. In both cases, he will be lending the land/building to someone in exchange for payments, that will usually be made on a monthly basis. Here is how the valuation of the building would be made:

Revenues (monthly rent) – Expenses (Capital+Interest+Taxes+Fees+Wages for concierge, etc+other expenses)

You will then get a monthly profit amount which after all expenses, tends to be very low. Let’s say 800$ per month. To determine how much the building will be sold for, you put up a multiple to the annual profits. In this example, the estimated profits are 9600$ per year. If you set the multiple to 20, you would be getting a value of 192,000$. Expensive but over 20 years you would expect to make back that cost but also profit from any gains in the value of the property right?

It is a simplified example but I’m sure you get the picture. 192,000$ of investment yielding you 9600$ per year in estimated profits. Interested in the deal? Just wait a minute….

Internet valuations

In the virtual world of the Internet, properties that yield a profit would sell for much much less. In fact, you would probably expect to pay about 20,000$ for a property that makes 8-10K per year. Of course, that can vary quite a bit depending on the exact property but the multiple of 20-25 years for an offline business becomes a multiple between 1 and 3 to 4 in most cases for internet properties.

Sounds extreme doesn’t it? I mean how could two investments that yield a similar return in terms of cash flow trade at such different prices? There are a lot of reasons but I would still say that investing in the “virtual world” looks like a mighty good proposition. Unless there is something more to know?

Risks/Rewards Involved

Of course, there are different factors to be aware of when buying a website, a domain or a blog.

Different set of skills/knowledge required: When buying real estate, you need knowledge of price trends, of taxes information, all of the legal requirements and consequences, getting a mortgage, etc, etc. When buying an online property, the range of knowledge required is smaller but I would say that knowing the market is as important or perhaps even more so. There is less transparency around internet properties which means you can get good bargins but also bad apples. It is important to look into what makes the website successful, where does the traffic come from, revenues, etc. Is the business model sustainable? What could change the future perspectives?

Leverage: When buying a house or traditional type of real estate investment, banks will generally be more than happy to help you out buy it. Provided you can make a decent down payment, the bank will generally lend you the rest of the money. That is great because it expands the possibilities in terms of your buying power. But of course, you do end up paying interest on that loan so it’s not all free. Because internet or virtual purchases are considered intangible assets, banks will hesitate greatly before making you a loan guaranteed by such a property. Cash is king when you want to buy such properties.

Risk involved: This is probably the most important factor. When buying a house, you can expect little changes that will impact your investment. Sure, there might be a fire, a natural disaster, a tax increase, etc. But generally, you know what to expect. An internet business can change quickly. You can have a huge competitor jump into your space from one day to another that would impact your investment greatly. So yes, there is more risk. No doubt about it. However, I personally think the rewards are much greater too

Growth: While valuations of a traditional business can rise, a 2-3% rise per year is already considered very important. On the internet, you could expect such a rise every month or so in early ventures, and could easily hope for 20-30% even in a well developed website.

Future valuations?

Because of the fact that few investors know about these virtual investments, they are very cheap right now when compared to more traditional investments. I would expect those multiples to increase in the next few years as the knowledge about these investments becomes more mainstream.

M35 inc

Wondering if I am doing this myself? Yes of course. IntelligentSpeculator is owned by M35 inc. which owns a few personal finance blogs (the more known one is TheFinancialBlogger.com), as well as non-finance related websites. It’s a young business but growing quickly and we hope to accomplish a lot more in the coming years…!

Quick news – June 23 2010

By: ispeculatornew | Date posted: 06.23.2010 (3:41 pm)


Microsoft (MSFT)
added entertainment oages to Bing to help users watch videos and listen to music
Monster Worldwide (MWW) was raised to Outperform by Oppenheimer
The Knot (KNOT) was raised to “Positive” by Susquehanna
Google (GOOG) CEO Eric Schmidt told CNBC that 160,000 new Android users were added every day
Google (GOOG) won its case against Viacom regarding Youtube patent infringement

Top performer:    The Knot (KNOT) +1,76%

Worst performer:    Adobe (ADBE) -7,27&

Building a Fixed Income portfolio with ETF’s

By: ispeculatornew | Date posted: 06.23.2010 (4:08 am)

A few years ago, having a fixed income portfolio was possible if:

a) You were a large institution

or

b) You were willing to incur huge costs.

Why? Because Bonds and other fixed income instruments do not trade on listed markets. They are also traded through huge volumes. That means buying and selling low volumes generally results in unfavorable prices. And since you do not have access to “closing prices” or intra day graphs on most of these bonds, you really do not know how much commissions you are ending up paying to your broker/financial adviser when  they do fixed income transactions.

There was also the possibility of buying mutual funds that build bond portfolios. But as you hopefully know by now, I’m not a big fan of mutual funds and all of the costs incurred through them every year makes it only slightly better than trading the outright bonds. Of course when saying all of this, I’m speaking to individuals who have a smaller portfolio, maybe under 200K. If you are lucky enough to have a very large portfolio, trading the bonds outright is probably the easiest and cheapest way to go. For all of us not in that category, there is new hope….

A new era

But that is quickly changing with the arrival of many fixed income ETF’s . These ETF’s have much lower fees and are more tax efficient than similar mutual funds and are now diversified enough for investors to build a solid fixed income portfolio. No it’s not perfect yet and more ETF’s will be released to fill out the holes but I think that it is good enough to be the best solution for almost all investors looking to get a fixed income portfolios. Such a portfolio can provide good diversification but also be a good basis towards building a passive income.

Preferred shares ETF’s

It’s not 100% clear if Preferred Shares should be considered as fixed income or equity and honestly both could make sense. We have often included them as fixed income but not for this specific post. That being said, here are a few preferred share ETF’s in case you were interested:

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What should a fixed income portfolio include?

The basic fixed income portfolio would contain some Government bonds, Corporate Bonds and International. Bonds. Since every investor has different amounts to invest, I thought I would give two examples of portfolio structures that could be used. The first one is the simpler. A portfolio with less than 10,000$ or even a bit higher could use only 3 ETF’s and have some level of diversification and income. Here is what a very simple portfolio could look like (don’t worry, we’ll go over individual ETF’s later on):

Then, as you add more money, you can start adding more sub-classes that are an essential part of a fixed income portfolio. Even now, you can fill most of those classes with ETF’s. Without further waiting, here is a more complete portfolio example:

The Categories

Government bonds

Governments are by far the biggest bond issuers. They are generally reliable, have very very large amounts of debt (well beyond what any corporation would be able to borrow) and are able to easily issue bonds (except in specific cases such as Greece). Government issue bonds in many different ways and at all levels (National, State, Municipal, etc).

Treasury : These are the bonds issued by the US governments. They usually a pay a fixed interest coupon every 6 months. There are a variety of ETF’s that can be used to trade these but they often depend on the maturity you want to trade. More on that later on.

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Municipal : Municipal bonds are issued by local governments and have specific tax incentives that give incentives to own these. They usually also offer higher yields because local governments are seen as more risky. A good mix between treasuries and municipal bonds is usually a good way to gain additional return.

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Tips : These are government issued bonds that pay a floating interest. They are linked to inflation and pay more when inflation rises. Because of that, they are a good way for investors to hedge against inflation which can become a major worry for a lot of individuals especially when they are no longer earning income apart from their investments.

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Corporate

Corporate bonds are issued by all kinds of corporations such as General Electric, Microsoft, etc. These companies pay coupons and can   range from the best and wealthiest companies to those already in bankruptcy.

Investment Grade : These bonds were issued by companies that have very little risk of default according to the rating agencies. They pay smaller yields but also have very limited risk. Some of these companies even pay less than the Federal Government.

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High Yield : These bonds were issued by companies that have bad credit ratings and have a fairly high risk of default. They must pay very high yields to attract investors because of the higher risk associated with owning their bonds.

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International Bonds

It is always surprising to hear investors get such good diversification in equities but not look for the same with bonds. Granted, it is more complex and costly, but the diversification is worth it in my opinion. There are few ETF’s that fill this need but I would bet a lot that it will improve in the coming months

International Government Bonds: Foreign government often must offer much higher yields because of the risk involved. While bankruptcies can happen (Argentina and Russia were two major ones), a good fixed income portfolio should have some exposure to this sector.

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International Corporate Bonds: Many large corporations in Europe and Asia do not issue bonds in the US which provides opportunities to get more diversification by buying not only local corporate bonds but also international ones.

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Duration, Diversification, Ladder

Up until now, we have only looked at broad categories of bonds. More advanced investors would probably consider investing depending on the duration. The longer the bond has till maturity, the more sensitivity it has to interest rate movements (all other things being equal). Also, investors might have specific liquidity needs that will encourage them to look for bonds issuing near a specific date. For that reason, an increasing amount of ETF’s focus on the categories described above but for specific target dates.

Here is an example of bonds ETF’s offered by Claymore:

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Quick news – June 22 2010

By: ispeculatornew | Date posted: 06.22.2010 (3:22 pm)


Apple (AAPL)
confirmed it had sold 3 million Ipad in the first 80 days it has been available
Google (GOOG) announced it would launch a music store later this year to compete with Apple’s (AAPL) Itunes
Google (GOOG) opened the doors of its Google Voice service to all Americans
Verizon (VZ) confirmed it was ready to support the Apple (AAPL) Iphone, speculation is it will be available in 2011

Top Winner: No surprise, Apple (AAPL) was the only stock on our radar to have a positive day thanks to the Ipad sales

Top Loser: NetEase (NTES) lose 5.37%, not dramatic considering the huge rise in yesterday’s trading

Dream lifestyle thanks to passive income?

By: ispeculatornew | Date posted: 06.22.2010 (4:10 am)

I know of very few individuals who do not at some point dream about the ultimate liberty when you do what you love, make decent money out of it, can go on vacations or take a break for a day or a week without asking for permission. Oh and did I mention being able to work from anywhere in the world from your basement to Beijing or Moscow? Very few of us actually get the opportunity to live such a lifestyle but aspiring to it would actually be considered a good first step. Making a plan and following through is the more difficult and challenging part.

What is passive income?

There is probably a different way to express passive income for everyone as even words like retirement can have a million different meanings. But to me, passive income is “Income that is generated with such a small effort that it would continue to stream through even if that individual took extended holidays”. There are an infinite number of ways to create passive income streams and I decided to take a quick look at a few of those in this post by sorting them into a few categories:

1-Investment

1.1-Dividend Portfolio: This is something we will be spending more energy into in the coming weeks but I think many investors see real potential here. The idea is to generate a big enough portfolio to be able to live on the dividends that are received every year. Once the dividend portfolio is built, it can be maintained with little effort. Of couse, as we wrote in the past, it’s not always about getting the highest dividend yield but you can look at our list of top dividend yields.  The goal is twofold here: Building a portfolio with enough income to: Live by and avoid using the capital (selling shares). Once you reach that level, you can in theory live off of this income for a long time. Ideally, you can even increase your “Portfolio value” to account for inflation.

My business partner and I have built up a very solid resource to help you build the ultimate dividend portfolio, give us a try at dividendstocksrock.com. The website has stock lists, sample portfolios, a premium newsletter and more.

1.2-Fixed Income Portfolio: The most common source of income for retired individuals is a portfolio mostly composed of fixed income. I’m personally not a fan because the fees involved on trading these are incredibly high. There are cheaper ways to do this including investing in Fixed Income ETF’s. They provide the same exposure (more or less) but diminished fees. Building an efficient and diversified Fixed Income ETF portfolio is a bigger challenge than a Dividend Stock Portfolio but can be done more easily as new ETF’s are released every month or so…

1.3-Real Estate: A real estate portfolio that includes residential and/or commercial land and properties can also provide a very important source of passive income. Basically, if you are able to buuy properties that generate enough monthly cash flows to pay off the loans and expenses (taxes, handyman, etc). Real Estate is generally a safe way to avoid losing money in case of inflation as the value and cash flows will generally increase as well.

2-Own a business

2.1-Online: I will be writing more about this on Thursday but there are a ton of opportunities in terms of building a steady and fairly passive income flow on the internet. This can be done by buying or building internet websites that either provide information, sell a product or even a blog like this one. IntelligentSpeculator’s goal is not to discuss this type of income too much and you would find more information on TheFinancialBlogger but I will still be writing about this soon, including a post on Thursday.

2.2-Offline:There are a billion different things that can be done from opening a lemonade stand to opening a restaurant, a hotel, etc. The objective however remains the same: Buying a business that can be basically managed by someone and generate a steady cash flow every month. The upfront costs are usually more important especially compared with an online business but even that varies a lot from one business to the other. However, you definitely have to consider employees salary, place renting fees and other expenses like power bill and telephone. You can save money on a telephone plan for your business with Megapath voip pbx.

3-Government or Pension plan

This one is smaller and rarely enough to have a great lifestyle but it does help out. Many companies or governments offer pension plans that will pay you X dollars every month once you retire. That is not something we’ll discuss because you do not want to depend on that for your retirement or passive income. Imagine those who had a great pension plan offered by Enron or GM…

There are a billion different things that can be done from opening a lemonade stand to opening a restaurant, a hotel, etc. The objective however remains the same: Buying a business that can be basically managed by someone and generate a steady cash flow every month. The upfront costs are usually more important especially compared with an online business but even that varies a lot from one business to the other. However, you definitely have to consider employees salary, place renting fees and other expenses like power bill and telephone. Filing cost are usually minimal and experts like Sun Document Filings can assist you in deciding the type of business you want to start (e.g. llc,lp,llp etc.) based on your situation. You can save money on a telephone plan for your business with Megapath voip pbx.

Reinvest till you need it or till you are ready

In all of these cases, building this portfolio can turn out to be a lifelong goal that is part of how you manage your personal finances. The recipe is quite simple though. Slowly create your passive income sources, try to grow it every week and every month and re-invest as much as you can instead of spending it. The more money you can reinvest into your current passive income streams, the faster they grow. If you are building a dividend portfolio, you can reinvest all dividends received until you truly decide to live off of the portfolio. Over a couple of decades, that is a huge difference.

How much do you need ?

That number is different for everyone. I guess the main question you need to answer is how much you need every year to be satisfied. If you need 50,000$, then you either need a 1,000,000$ dividend portfolio with a 5% yield or perhaps a few appartment buildings with no mortgage, or a website that sells ebooks, etc, etc. There are so many possibilities.

Diversification

Like any investment advice, I would say that it is critical to not count on only one source of passive income. There can be events that greatly affect your income source even in a well diversified dividend portfolio. But if you depend on 2 or 3 different sources, the chances of having a serious disruption are much more remote.

It’s all about small things and a daily dedication

I think it’s important to always keep the big picture in mind. If every time you think about spending 100$ you imagine that this 100$ could also be spent in a dividend stock that will pay you 5$ every year for life, you might spend a little less. It’s not about always being frugal but simply being smart about your money, paying yourself first and sticking to your plan!

So my question to you is do you aim for such a goal, if so, how do you do it? How well are you doing?

Closing Trade on Priceline (PCLN) & Travelzoo (TZOO)

By: ispeculatornew | Date posted: 06.22.2010 (3:03 am)

As you saw in the quick news post yesterday, Travelzoo’s (TZOO) got crushed in yesterday’s trading and that was enough for us to reach our stop as we were short the stock against Priceline (PCLN). The trade currently stands at +21,71% return and will be closed at today’s opening! That also means next Monday will feature a new post. Still trying to figure out why Travelzoo lost so much yesterday but I have to say that I’m not complaining, the stock was overvalued.

Quick news – June 21 2010

By: ispeculatornew | Date posted: 06.21.2010 (3:19 pm)


Quinstreet (QNST)
was raised to  Overweight by Thomas Weisel Partners
Russian president Medvedev will meet Google (GOOG) CEO Eric Schmidt
Barnes & Noble took down the price of its ebook reader “Nook” from $259 to $199
Amazon (AMZN) answered back with a price drop of its own from $259 to $189 for the Kindle
Palm (PALM) confirmed there would soon be an operating systems upgrade

Top Mover: NetEase (NTES): +10.22%


Top Loser: Travelzoo (TZOO): -9.58%

Is Facebook worth 1/5 of Google (GOOG) ?

By: ispeculatornew | Date posted: 06.21.2010 (4:16 am)

We have discussed Facebook’s future IPO in the past. Even though the company is not public yet, there have been enough public transactions to get a clear idea of how much Facebook is  currently worth. That currently stands between $25-30 billion. If you look at Google’s current value, it stands at close to $159 billion. As regular readers know, I might have fallen for Google but that being said, I still think that Google is undervalued right now when you consider all of the possibilities that exist for the coming years. But for argument’s sake, let’s take the current valuations to make this analysis.

Would you prefer owning Facebook or a fifth of Google?

I think that there are many different ways to look at the question and to be honest, most of you can’t afford either:) But we could buy shares in one or the other:) Here are a few of the different things I looked at when evaluating the two companies.

Traffic

It’s not a clear question because Facebook has so much momentum right now. It is gaining thousands of new users every day and even is rumored to approach 500 million users (although Facebook officially still gives the 400 million number). In a way, Facebook is even redefining the way internet users interact with each other which even prompted the Facebook COO to predict that email is dying. I wouldn’t quite go that far but what is clear is that Facebook represents the “newer” way to use the internet. Is it by luck that Facebook was recently the most visited website (although that was only compared to Google.com, not including all of Google’s other properties such as Youtube).

Revenues

Numbers came out and according to Reuters, Facebook made $800 million in revenues last year and should be well above $1 billion this year. Certainly impressive numbers but still  far from Google’s $23.65 billion in the last year. Of course, those numbers are likely to grow much more quickly at Facebook and would certainly jump the day that Facebook put a decent effort into generating money. I don’t think anyone would say that has been a main focus of Facebook.

Focus

I think that is one of the main differences between the two companies. While Google is splitting its energy between Operating Systems, Search, Google TV, Youtube, Email, News, etc, etc.. Facebook has been truly focused on its social website and apart from smaller projects such as “Universal Logins” and a “Facebook Currency”, it has remained very focused on improving its

Time for a decision???

I know, I know, it’s time to take an actual decision. I would first try answering by saying that I’d like to buy both, they both look very attractive in my opinion. But I was pressed to take just one, I would personally go with Facebook right now. I think that at current valuations, Facebook is more attractive because even if it is trading at valuation about 5 times lower with revenues 25 times lower, the growth is simply too great to be ignored and as soon as Facebook puts some focus into revenues, it will be able to easily double its current valuations, probably even better. If Facebook simply got the same revenues per visitor as Google, there would no longer even be a question.

So now I ask you the question, which do you prefer, a fifth of Google or owning Facebook?

Financial Ramblings

By: ispeculatornew | Date posted: 06.19.2010 (6:54 am)

Good Saturday to all of you. Tough result for the US team yesterday in the world cup as they were robbed from the win and had to settle for a tie against Slovenia. Hopefully they can still advance with a win in their last match. What is the best strategy to avoid having traders call in sick with all of these matches going on? Give them TV’s🙂 Before starting, I invite you to go see a guest post that I published on StockTradingToGo: What type of trader are you?. Any by the way, Blain from StockTradingtoGo launched a new website to compare Online Brokers, you can take a look at TradeWiser.

Exxon Mobile: Priced to buy for Dividend Growth Portfolio @ DividendTree
REIT analysis using Funds from Operations @ MillionDollarJourney
US consumer spending chartfest @ TheBigPicture
Current commentary from current financial market trend @ ZeroHedge
Why real estate might not be the greatest investment strategy @ TheFinancialBlogger
Apple could hit 300$ but don’t fall in love with the stock @ BloggingStocks
My worst financial moves in college @ GreenPandaTreeHouse

New ad from Adidas with a Star Wars theme:)

And finally, one of many video’s that are not helping BP right now!