Archive for February, 2011

New Trade: Long Google (GOOG) & Short (AOL)

By: ispeculatornew | Date posted: 02.14.2011 (5:00 am)

We are off to a great start again this year with our stock picks and as I mentioned yesterday, I will be closing off the trade on Apple (AAPL) and Blue Nile (NILE) later this morning which leaves us 2 free spots for new trades. So today, we will be entering into one trade. Our average trade currently returns over 13% so far this year, well beyond our goal so for now we can only work hard and hope things keep up. Many will be surprised to see this trade, not because I am going long Google (GOOG) but because the company that I’ve been increasingly positive about, AOL (AOL) will be on the short end of this trade.

Before going further, here are the main numbers that we looked at:

[table “249” not found /]

Trend Analysis

The trend analysis score favors Google (GOOG) in a big way and to be honest I’m a bit surprised at how one sided the competition is!

Long Google (GOOG)

Last week I explained why I still believed that having Larry Page at the very top was bullish for Google but also mentioned that it was unclear how things would go in the short term. I’m a bit worried about investors staying away because of the lack of clarity and information but we will see. Having Google trade at a forward P/E ratio of 15, more or less the same as AOL screamed trade opportunity. Google does have its challenges but overall the company’s perspectives still look solid. I certainly hope that Larry Page will execute a few of the things that I had said I would do if I were Google’s CEO but

Short AOL (AOL)

Don’t get me wrong, I’m a big fan of what AOL has been doing in the past few months, especially their recent acquisition spree and I think buying the Huffington Post was brilliant (as had been the smaller purchase of TechCrunch) as was putting Mrs Huffington in charge. I was full of praise in my post about being AOL CEO Tim Armstrong for a year. That being said, this trade is being done on valuations purposes only and from that perspective, AOL looks very expensive. The company comes from very far, still is seeing declining revenues and to have an almost identical P/E ratio as Google. I did honestly think I would go long AOL soon but that trade was not there, it will have to wait a little.

Just take a look at the charts for both companies:

Disclosure: I do not hold positions on either stocks

Closing Long Apple (AAPL) & Short Blue Nile (NILE)

By: ispeculatornew | Date posted: 02.13.2011 (5:00 am)

Good news as I will be closing out the trade on long Apple (AAPL) & short Blue Nile (NILE) which closed out on Friday’s close at near +23%, it will be closed on Monday’s opening. The trade ended up paying off from the start but the major jump happened when Blue Nile announced disappointing results once again last week. Stay tuned, a new trade will be posted tomorrow morning as well!

Financial Ramblings

By: ispeculatornew | Date posted: 02.12.2011 (2:05 pm)

It has been some time since I posted ramblings, I’ve been incredibly busy in the past few weeks and have also been stuck in the snow a fair bit, although not as much as some were in Chicago as you can see in this picture (I personally cannot wait for the summer to return!!). In any case, I’m back and ready to rock again! Here are my top readings in the past week:

What happened in the dividend world in 2010 and what will happen in 2011? @ TheDividendGuyBlog
AOL-Huffington Post: Why the heavy breathing? @ TheBigPicture
The US is spending 17.6% of its GDP on health care @ Curious Cat
Why Egypt matters to you and your money @ 20smoney
TFB Monthly income report @ TheFinancialBlogger
Pimco’s battle call to bond vigilantes @ BalanceJunkie
Vietnam devalues currency @ Marketwatch
Do you invest ethically? @ DividendMonk
Despite common knowledge, prices are surging @ Zero Hedge
7 ways to invest your retirement savings @ DoNotWait
Dividend Policy: Microsoft vs Berkshire Hathaway @ MBACaseStudySolutions

Google (GOOG) shareholders, are you comfortable with your new CEO Larry Page

By: ispeculatornew | Date posted: 02.11.2011 (7:51 am)

When Google was founded by Larry Page and Sergey Brin, it was built as an “ideal”. It was geared towards making the world a better place, doing no evil and without being too offensive, the priorities were not entirely geared towards profits. Now that Larry is back in charge, should shareholders and long term believers such as myself be worried about where the company is headed? It’s worth asking the question. When I posted about what I would do if I were Google CEO Eric Schmidt for one year, I did not mention anything about putting Larry back in charge. To be honest, it’s not like I had considered it either but that’s not really my point.

Larry’s past at the top of Google

I think it’s important to point out that things did run fairly well when Larry and Sergey were running things. Sure, Google was not the money making machine that it is today but a big part of that was the singular focus on the user and a long term perspective, an attitude that I have praised Facebook CEO Mark Zuckerberg for having. When Eric Schmidt arrived, he was bringing experience and that did end up happening just in time for Google to start making money for its shareholders.

Is now the time for Google to let Page back at the top?

In terms of search, Google has it fairly figured out and while some challengers like Microsoft’s Bing do create competition, it’s fair to say that the business mature and I don’t expect much change to happen in that area. However, for other businesses such as Android and Social, things are not as clear and I think the more innovative, risky and long term visions of Page might help Google better compete with very tough competition from Facebook, Apple, Twitter and others. Not that it couldn’t have happened under Schmidt but the more corporate attitude at Google made changes and innovation a bit slower in my opinion which did not help in social media for example.

Downsides?

I don’t think there are any doubts that there could be a price to pay for investors in the short term from this change in leadership:

Decisions like leaving China: One of the key moments said to have led to this change of leader is the arguments between former CEO Schmidt and the founders about leaving China. Ultimately, the founders won and Google did leave. Do you think it’s by chance that Google was the only top tech company to take such drastic action even calling out the Chinese government in what even required an intervention by the secretary of State Hillary Clinton? It is an incredibly risky move but one that has Page & Brin written all over it. Will it turn out to be a good move? Time will tell but such moves create uncertainty and in the short term, shareholders do not like it.

Less corporate talk: Eric Schmidt valued being clear about Google’s vision, explaining things to Government officials, the media and to shareholders. To say that will change is a major understatement. Page never was a fan of public speaking and he is more about getting things done. You could say that it is better and I wouldn’t disagree but the world isn’t so simple and it is bound to create some controversy and conflicts.

Organized chaos: in most companies, launching a product will go through strategy commitees, marketing planning and a bunch of reviews. Wonder why Microsoft launches products so infrequently? Because they are the typical example of a big corporate structure and Google was becoming just that. It was a nightmare for Page as they compete with more nimble companies like Facebook which can launch features or products almost overnight. Expect changes at Google which will be good but could also lead to some mistakes.

Overall opinion

I have no doubt that in the long term, the return of Page at the top will be a great thing but it could be a bumpy ride for GOOG investors.

Disclosure: No positions on Google (GOOG)

EFA ARCA SELL 55 100
EWJ ARCA SELL 55 100
CGW ARCA SELL 55 200
HGI ARCA BUY 2 900
CVY ARCA BUY 2 600
RWX ARCA BUY 2 300
ICF ARCA BUY 2 200
ATH ITS BUY 2 200
BTE ITS BUY 2 100
PXX ITS BUY 2 400
CNQ ITS BUY 2 200
COS ITS SELL 55 100
CVE ITS BUY 2 100
CLL ITS SELL 55 100
ERF ITS BUY 2 0
HSE ITS BUY 2 100
IMO ITS BUY 2 100
IE ITS SELL 55 200
MEG ARCA BUY 2 100
NXY ITS BUY 2 100
PWT ITS BUY 2 100
PBG ITS BUY 2 100
SU ITS BUY 2 0
STP ITS SELL 55 100

Will we soon be trading on one global exchange?

By: ispeculatornew | Date posted: 02.10.2011 (8:40 am)

In the past 72 hours, the London Stock Exchange has announced it was “merging” with the TMX Group which includes the Toronto, Montreal and Calgary exchanges and is one of the top 10 stock exchange companies in the world. First off, just a comment. This is NOT a merger. The LSE is buying TMX group, it is much bigger by almost any mesure.They are calling it a merger for political reasons. What do I mean? Canadians do not like to have their big companies taken over by foreign ones and the best example of that was the recently failed takeover of Potash (POT) by giant mining company BHP Billiton.

In any case, that was a big deal with major implications for stock exchanges and where they are headed. But the stunning part was that news broke about a much much bigger deal as the New York Stock Exchange (NYSE) is in advanced merger talks with Deutsche Boerge AG, the huge German exchange. The German exchange is already among the 3 biggest in the world and would jump to #1 if this did go through. It is quite fascinating to see these huge exchange mergers and it certainly raises a lot of new questions…

Why are these mergers happening?

In one world – Globalization! Stock exchanges make money in several different ways:

-Trading fees (on all transactions)
-Listing fees (for companies to become listed)
-Maintenance fees (for all participants)
-Data services (sold to institutional clients, media, etc)

The world used to be a much simpler place. Take the Toronto stock exchange. Just 5 or 10 years ago, it was a given. Canadian companies would become listed in Canada, be traded on the Toronto stock exchange only, etc. In fact, just 3 years ago, the Toronto stock exchange had a 95% market share. But many new participants have started offering faster, more efficient and cheaper alternatives and the market share is already down to 64%. Amazing isn’t it? It is happening all around the world as exchanges compete for trading volume and listings. It is now fairly easy for companies to choose where they want to get listed. But even more important, trading a stock like Potash can be done on a multitude of stock exchanges at the same price. That is competition at its most intense as exchanges fight for tiny fractions of pennies per trade, for speed measured in milliseconds, etc.

How has it changed? Because most of the volume is now traded by High Frequency traders. These traders can switch all of their volume away in a split second from one exchange to another depending on what is offered to them in terms of speed, fees, etc.

Will these consolidations continue?

I have no doubt that they will. Why? Because while there are differences between markets, things that are developed for one exchange can often be used on another opening possibilities of large scale cost savings.

So are we headed towards one huge exchange?

I personally do not think so. A lot more exchanges are being created these days that each have a different purpose and Canada…

I think that this new world will have a few mega exchanges that will be alliances such as the NYSE-Deutsche Borse with hundreds of smaller players.

What do you think?

Dividend matchup: UPS (UPS) & Fedex (FDX)

By: ispeculatornew | Date posted: 02.09.2011 (5:44 am)

One of the very popular posts on this blog in 2010 was the dividend match up between Coca-Cola (KO) and Pepsi (PEP) which is certainly a classic no matter how you look at it. I was looking at finding another match up after comparing McDonald’s (MCD) and Yum! (YUM) a few weeks ago. Then last night I saw what almost looked like a race between a UPS (UPS) truck and a Fedex (FED) one which certainly seemed like an interesting one to look into. They are in very different classes regarding their dividends (only one makes the top dividend paying stocks list) but that could change fairly quickly so we decided to take a look following the 20 things that we look at when valuing dividend stocks.

Dividend Metrics

[table “246” not found /]

There is not much of a contest here as UPS pays a dividend yield almost 4 times higher with slower but very comparable growth. Sure, Fedex has been increasing its dividend more quickly by about 1.50% in the past five years but it would take a very long time to catch up if the discrepancy remains the same. The difference has been larger in the most recent year but I still must give a significant advantage to UPS here.

Company Metrics

[table “247” not found /]

As you can imagine, this is the opportunity for Fedex to catch up and it seems to do exactly that. Sales growth, a critical component as I discussed in the past is 1.40% higher, which is significant. All of the profitability numbers are difficult to analyze because of the effects of the recent economic turmoil but if you look at the payout ratio, you will see just how much Fedex could improve its dividend payout if it ever decided to close the gap more quickly.  The return on equity seems comparison seems exaggerated and both have almost no debt. So I would give the edge to Fedex quite clearly here although probably not enough to close the gap from the dividend metrics.

Stock Metrics

[table “248” not found /]


In technical terms, UPS is the better buy at the moment although not by very much and it probably does not create a big change given how one sided the analysis had been in the past.

Industry Metrics and Portfolio Fit

Both of these companies operate in exactly the same business, face the same struggles and are somewhat dependant on the economic growth to improve sales and be able to sustain dividend growth in the long term. There isn’t much of a difference between the names but since Fedex is more about potential than UPS, I would only consider it in a strong and diversified passive income portfolio while more recent/beginner dividend portfolios would probably be better off with the more important payout offered by UPS.

One more reason why AOL (AOL) will succeed where Yahoo (YHOO) will fail

By: ispeculatornew | Date posted: 02.08.2011 (5:00 am)

AOL (AOL) and Yahoo (YHOO) are similar companies in many ways and few of them are positive. Both are original dot com companies that once were leaders in their fields (ISP and search/directory) but tried to live off of the past for too long and are now trying to survive. One could say that they are not anywhere near bankruptcy but for dot com companies to see multiple years of declining revenues gives a clear picture of how bad things are.

That is why when I wrote about them in the past, I would often include them together such as here where IAC Interactive also made the “losers list”. In the past year or so, I have started changing my opinion about AOL and one of its great moves had been the purchase of tech blog leader TechCrunch. It was part of the strategy to focus on technology and advertising instead of trying to produce average content. Then in December when I wrote about what I would do if I were AOL CEO Tim Armstrong for a year, one of the suggested moves was buying the Huffington Post, the biggest blog on the web and what I and many others consider to be the perfect example of what media companies will be like in a few years. I can admit my faults but I got that one right! It seemed like a difficult and costly acquisition to pull off but rather than sit aside like others (Miss Bartz?!), Tim Armstrong pulled the trigger.

This acquisition is more proof that AOL is looking to the future rather than its past. Some have pointed to recent fights between their own techno blogs TechCrunch and Engadget as proof that things are mismanaged but I would actually say the opposite is true. If AOL understands that its strength is technology and advertising, it will not try to interfere in how its content units produce their content. Let them do what they know best.

But what does AOL offer The Huffington Post? It offers the ability for HuffPo to concentrate on content and on the user while AOL can provide the infrastructure both on the technology and ad sales side. Why? Because the HuffingtonPost advertiser is likely also interested in placing ads on a leading technology, or the leading local sites (Patch) as well.

One great example of Yahoo’s demise is its Sports units. Yahoo Sports remains to this day the top sports websites by visitors yet its growth has stalled. Why? Because while competitors like ESPN continue improving the user experience, the technology and the features. I am one of those Yahoo Sports visitors but like Yahoo finance, I have been going less and less often over the years. Why? Because others like ESPN simply offer more. I recently read an interesting interview with ESPN CEO and he said he expected strong competition but more from some guys in a garage somewhere than from Yahoo… That tells it all doesn’t it? While Yahoo continues to offer an average experience to its users, AOL is working to get the best of the best in. A few important segments.

Is it already too late for Yahoo? Of course not and I had personally suggested a few things that Carol Bartz could do but every day it becomes a bit more difficult to turn around this huge ship especially woth AOL already well ahead in the race

New trade: Long Amazon (AMZN) & Short Yahoo (YHOO)

By: ispeculatornew | Date posted: 02.07.2011 (6:00 am)

It is not a big surprise to all of you who are regular readers to see us go out with this trade. After being skeptical of Amazon initially, we have gradually become more optimistic about the company and seeing our earlier trade on Amazon and Knot fail was disappointing. On the other hand, things have been going great so far as we have maintained an average of over 9% per trade so far this year and going ahead with this one made a lot of sense. We see a lot more upside risk in Amazon and very little risk that Yahoo’s stock could gain very much unless someone made an offer but that is becoming less and less likely.

Before going further, here are the main numbers that we looked at:

[table “245” not found /]

Trend Analysis

Surprisingly, the trend analysis score favors Yahoo (YHOO) but I would say that is mostly because of the disappointing guidance that Amazon gave in its latest earnings report which had caused a drop in the stock price. No big worry here.

Long Amazon (AMZN)

Amazon has been on a remarkable streak in recent years as it remains the overall leader of this new ecommerce world and no one seems even close to catching up. Smaller players such as Groupon made remarkable strides but even there, an investment in LivingSocial seems to be a great way to counter the coupon trend. Overall, I think Amazon is placed incredibly well for both ecommerce and mobile plays which makes it current growth likely to remain for some time and its stock a solid buy at its current valuation.

Short Yahoo (YHOO)

Yahoo…. I could go on for a long time but a few of the reasons why I do not like this stock were listed in last week’s post that was addressed to current and potential Yahoo shareholders. The company is poorly managed, lacks direction, passion and a clear plan. For that reason, I do not see Yahoo’s sales taking off anytime soon and the non-existent growth is likely to remain for some time. Because of its valuable assets, the stock might not go much lower but it will probably not go much higher too which makes it a nice short.

Just take a look at the charts for both companies:

Disclosure: I do not hold positions on either stocks

Forex hedging in your dividend portfolio

By: ispeculatornew | Date posted: 02.04.2011 (5:00 am)

If you are a Canadian investor, you are without any doubt running into this problem or question. “Should I be hedging my passive income portfolio?“. To think of it, almost every investor probably runs into this problem at some point. It’s true that most Americans mostly invest in US holdings but it has been proven again and again that international diversification has a very positive impact to any portfolio; adding additional return (expected return) for a diminished level of risk.

For all of the American investors, we will help you look for some foreign dividend stocks in Canada and Europe that could help your portfolio and for all other investors, you probably already trade on US markets given its size and importance.

-Should you hedge?

That is the million dollar question and I prefer warning you in advance: There is no easy answer to this question as even huge multinationals and governments struggle with the same question on a daily basis. Let’s take a look at the pros and cons:

-Pro’s; You have less volatility and are less exposed to large currency variations.

-Con’s: Currency movements are part of the additional return generated by international assets. Also, hedging strategies can become expensive and often lack precision or efficiency.

I personally think that investors should in most cases remain unhedged but there are specific cases where that would not be true. For example, an investor that lives off of passive income could be very affected if the exchange rates move too much.

-What should I hedge?

The big question is what should you hedge. I think that in the case described earlier, hedging the flows or even the entire amount could make sense but it all depends on how much variability you can live with both in the value of your portfolio and the flows. Both could easily move by + or -20% and if you could not sleep well at night with that uncertainty, take a hedge. The main thing that I would say however is that you should not try to do a perfect hedge, you will lose too much time, money and energy in the process.

-How can I execute the hedge?

There are many different ways to get it done of course, here are a few:

Buying international dividend ETF’s (these will often already include some type of hedge)
Forex: It can be risky if you try to make a living off of it but is often the cheapest way to hedge, trading forex is easy to setup too and very easy to understand.
Forex ETF’s: We have discussed currency ETF’s in the past and while it is not always the most straight forward way, it can be fairly cheap and efficient.

What are your thoughts on fx hedging your dividend portfolio? Do you do it? Do you intend to?

Dividend stock analysis: Johnson & Johnson (JNJ)

By: ispeculatornew | Date posted: 02.03.2011 (5:00 am)

On Tuesday, we posted the top 100 dividend stocks and one of the more interesting things that we noticed was that 4 of the top 5 stocks were in the same industry: telephone! We will take a deeper look at those companies in tomorrow’s newsletter (sign up now if you have not done so yet, it is free) but in the meantime we decided to take a deeper look at a stock that certainly looks like a great part of a passive income portfolio on the surface.

So just how does Johnson & Johnson (JNJ) rank as a dividend stock?

Of course, we will be ranking Johnson & Johnson (JNJ) based off of the top 20 things that we consider when evaluating dividend stocks.

Dividend Metrics

[table “242” not found /]

Johnson & Johnson is certainly an interesting pick and not only is the current dividend yield very solid at over 3% but the 1 year and 5 year dividend growth are both near 10%. I would certainly give a great grade to JNJ.

Company Metrics

[table “243” not found /]

While the company metrics are not as impressive, they do remain rock solid. For such a big company, having sales growth of about 5% is very solid, especially in this difficult economy. That being said, it is unlikely that JNJ will be able to increase its dividend by 9-10% every year if sales are only increasing by half of that. That being said, the payout ratio remains fairly low and JNJ will probably be able to keep up the high dividend growth for many more years.

Stock Metrics

[table “244” not found /]

In technical terms, there is no doubt that the stock does not look very attractive and it’s trend analysis score is as bad as it gets; -100.

Industry Metrics & Fit within your portfolio

Johnson & Johnson is a very diversified company and it’s difficult to imagine a scenario where JNJ would have major trouble. Its growth could slow down but chances are very good that the medical products business will remain very steady. In terms of fit within your portfolio, JNJ would be a great fit in most cases, especially if you have a few growth or cyclical industry stocks.

Overall Analysis

If I compare Johnson & Johnson (JNJ) to other dividend stocks such as Verizon (VZ), Coca-Cola (KO) & Pepsi (PEP), McDonald’s (MCD) or others, I would consider the stock to be one of the attractive ones. I would personally grade it as one of the top dividend stocks.

Do you agree?

Disclosure: No positions on Johnson & Johnson (JNJ)