Archive for April, 2011

Closing Trade: Long WebMD (WMBD) & Short The Knot (KNOT)

By: ispeculatornew | Date posted: 04.19.2011 (4:19 am)

Good news for the first time in a few weeks, we will be able to close out a trade, specially, our trade on WebMD (WBMD) and The Knot (KNOT) which is actually our most recent one and currently stands at +20,88% so I will be closing it out on Tuesday’s opening. It might jump a bit at the open as WebMD was just upgraded by Cannacord. I have to say, it’s very possible that I will be opening up a similar trade in the near future as I think there is still money to be made on this trade. What helped us get over the top? It’s clearly The Knot which has taken a drop in the past 2 weeks while WebMD has been basically flat.

The best news of all? We will be opening up a new trade very soon, hopefully Monday!

Trends are trends… Facebook & Research in Motion (RIMM)

By: ispeculatornew | Date posted: 04.18.2011 (5:00 am)

You know, it usually seems way too simple to follow trends until they are broken. What do I mean? Some will buy stocks that rise and sell those that decline. The theory of course is that companies that have momentum will keep it up while those are heading to the ground will keep it up. In the tech world, it’s difficult to find two more extreme examples than Facebook and Research in Motion (RIMM). Last year, I had written about “catching a falling knife” as I discussed the buying of both RIMM and BP which had just suffered major losses following the oil spill.

Why buy beaten down stocks?

Many investors jump into stocks that seem to be free falling. Why? Because they expect the drop to be an overreaction and expect to end up buying at a lesser price than the actual value. It is done for long term drops such as BP and RIMM but also in very quick drops. For example, after the recent earthquakes, many Japanese stocks crashed very quickly within seconds. Some traders would then jump abord to buy and in this case as in many others, it worked out very well. But in can be risky in many others.. buying Lehman or Bear Sterns in their declines turned out be major disasters.

Trading the trend?

The opposite strategy of course is to trade on the trend. One of the most common ways to perform this kind of trading is by using the moving average. A stock that is above its MA is rising while one that is below is declining. The more extreme the variation, the more severe the movement. Often these traders will end up hoping to ride the trend until the very end and it can take some time…Why? Because there are often some very good examples why these trends occur…often explained by the underlying fundamentals.

Case in point: Long Facebook & Short Research in Motion (RIMM)

I know, I know, Facebook is not a public company so buying the shares is not easy. But I’ve said over and over how valuable I think those are. The company’s valuation has been rising faster than any other in the world. On the opposite side, Research in Motion (RIMM), the company that used to dominate smartphones is falling behind quickly and its stock has been reflecting that.Is it a coincidence?

Most recent examples

I think that most weeks offer several examples of why these trends have been going on for so long and this week has been yet another example.

Facebook: Brilliant move by the company to enter China, the most tricky and most difficult market to enter given the government restrictions that have forced many companies including Google out of the country. I have my theories on why this is happening (it’s not just about censorship) that I talked about last week but I think that teaming up with Baidu (BIDU) is brilliant because it will help Facebook become a solid player by aligning with the top Chinese internet company. As well, it makes it much more difficult for Facebook to be kicked out of the country as that would mean the country would be slapping Baidu at the same time…It’s a simple but smart move to enter what will soon be the most important internet market.

Research in Motion (RIMM): Two more reasons to dislike RIMM as this week one co-CEO stopped an interview midway in with the BBC because he did not like the questions. That’s not terrible though. But coming out with the Playbook over a year later with not much to show off in terms of capabilities, apps, pricing, etc. It’s honestly kind of pathetic . The hope of course is for the product to get better over time, to add apps (it will have about 3,000 at launch but this summer will gain access to most of those of Android stores).

In both cases, playing the trend has been a winning strategy for over a year now and I personally do not expect things to change in the near future. I would love to hear your thoughts on this..! Do you invest following trends?

Financial Ramblings

By: ispeculatornew | Date posted: 04.16.2011 (7:11 am)

It has certainly been a very interesting week and I was stunned to see Google get crushed so badly in Friday’s action despite the fact that most of the increased expenses were known weren’t they? I certainly expected and had actually written most of my Friday post before seeing the results. It’s going to be a very interesting next few months with Larry Page heading Google.

Foreign dividend tax treatment @ WhatIsDividend
Which US companies have the most untaxed profits? @ TheBigPicture
Google’s Larry Page does exactly the right thing: Says “whatever” to Wall Street @ BusinessInsider
Dividends: Where do you include them in your asset allocation? @ TheDividendGuyBlog
Google’s earnings grow 19% but investors unhappy @ CuriousCat
Spending or saving? How to balance money management @ TheFinancialBlogger
Observations regarding the Chinese real estate decline @ ZeroHedge
Johnson @ Johnson (JNJ) dividend stock analysis @ DividendMonk
The New Global X FTSE Andean 40 ETF @ MoneyEnergy
How do you deal with financial stress? @ BalanceJunkie
Stock trades: Bought SkyWest Energy @ BeatingTheIndex
What jobs can I get with the CFA? @ SmartFinancialAnalyst


A new era has truly began at Google (GOOG)

By: ispeculatornew | Date posted: 04.15.2011 (6:00 am)

Google might be one the top tech companies competing what sometimes seems like hundreds of companies at once through its dozens activities but Larry Page, one of the initial co-founders is now back on top and he seems on a mission. What is the mission? Quite simply to bring back Google to its roots, to what it was a decade ago when it was still operating in a start up way. Easy? Hardly! Running a public company with tens of thousands of employees as if it were still ran by Larry and his closest associates is no easy task. How is he doing it? Let’s take a deeper look at the company I love so much (as an investor of course!).

Using cash aggressively

Yesterday, Google announced its latest earnings and the stock is likely to drop 2-3% this morning as analysts were disappointed and surprised by the high level of spending that occurred (I still see the company as very undervalued) Revenues were in line but expenses were not and it showed as a large portion of the analysts asked questions regarding the revenues in attempts to determine if those will be recurring. It’s unlikely they all will be but I think it’s also obvious that the new Larry Page ran company will certainly be spending more.

Start ups must raise money at a rapid pace when they are successful in order to reinvest, improve products, attract top talent, etc. In just a couple of weeks, Larry Page has already bid about $900 million for a portfolio of patents that belonged to the now bankrupt Nortel Networks

Then, it became known that Google had thrown out tens of millions of dollars to retain a couple of high level product managers from defecting to Twitter. That is certainly aggressive and not something a more traditional public company would often do. Larry has also been increasing hiring in a few key sectors, increasing salaries to be more competitive, etc.

So what about all of the other employees? Google has basically deemed social to be critical for its future success and what are deemed to be growing challenges from Facebook. Larry page did not simply send out an email outlining the importance of the social projects success. Rather, he told employees of the entire company that a 25% bonus would depend entirely on the success of these initiatives. It’s unclear how much measures like this will help but it’s certainly a way to get employees back in the start up mentality.

Taking control of Android

Now that Google has basically captured all of the mobile momentum and that Android will soon own half of the smartphone market share, Google is bringing in some controls that while necessary will also mean more control and more revenues down the line. It will not become the next Apple but the notion of Android being open source is already questioned. That tendency is likely to continue over the next few years as Google starts making plans for increased profitability.

What about the shareholders?

I don’t think it’s difficult to see that management has changed and a new era has begun. The guy who thinks way outside of the box is now in charge and his priorities are not about pleasing shareholders but about taking Google stock to the next level but rather taking the company. In the long run it comes out to the same thing but I fear that in the short term such initiatives will mean increased costs with flat revenues. Why? The experiment for social is a good example as even success would bring limited short term benefits but would bring major costs because of those bonuses. So yes, that would mean diminished profits.

Another challenge will be that Page is not known for liking to communicate with the press or with financial analysts. He is shy and prefers to work on products than trying to explain what the vision or long term projects are and that will certainly result in less transparency for the shareholders which he will certainly be criticized for. It certainly would have been interesting for him to join yesterday’s Q&A portion of the call but I guess that will not happen very often unfortunately.

In the end

I think Page’s increased spending, big ideas and vision for a much more agile, faster, and better version of Google will mean diminished returns over the next few years if investors do not get a clear vision of what is going on (which they likely won’t) but will mean great things in the long term. So while I still believe in the short to medium term future of Google’s stock, I think the long term perspectives are even better and will remain a long term Google bull.

Disclosure: Long Google

Dividend Analysis: Chevron Corporation (CVX)

By: ispeculatornew | Date posted: 04.14.2011 (5:00 am)

Earlier this week, we did a detailed analysis of Intel Corporation (INTC) in order to see if it could be a solid part of a passive income dividend portfolio. The results were impressive and it’s one of the most impressive results that I have gotten since starting to look at dividend stocks. Obviously, I still need to find many high quality dividend stocks and today I take a look into one of the more solid picks in the commodity sector, specifically an oil play. Oil is often deemed as being “dirty” and on its way out but the reality is that the global economy depends on oil and that is unlikely to change for a very long time. Companies like Exxon and Chevron are not only formidable companies but they are likely to remain critical for decades to come.

While such companies require important investments, they generate so much cash that they are able to reward their shareholders with dividends making them very good candidates.

Without further wait, let’s take a deeper look into Chevron Corporation (CVX) as a dividend stock based on the 20 things that we consider when analyzing dividend stocks.

Dividend Metrics

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The yield over 3% with solid dividend growth over both 1 and 5 years is impressive and from the chart I think it’s fair to say that Chevron has been a solid dividend play for over 2 decades now!

Company Metrics

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Considering the size of the company, the sales growth over 1 year seems like an anomaly and the 5 year rate of about 2% seems more realistic but I personally am a bit disappointed by the slow growth rate. It is positive but if it cannot accelerate it will be difficult for CVX to keep the dividend increasing at the same pace it has recently.  That being said, the P/E ratio seems reasonable, the margins growth is good and it’s always a great sign to have a company with virtually no debt and a payout ratio under 30%.

Stock Metrics

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No doubt, momentum is quite strong for Chevron…!

Industry Metrics

The one worrying trend for energy companies remains the fact that they will eventually run out of oil but that seems to be a lifetime away at this point and Chevron as have others has been getting prepared for the “after oil” era.. I do not see this as a significant issue at this point. Another significant point is that these companies have significant power in the US government that helps them maintain their “power”. I think it’s definitely a great idea to have some of your investments in the energy field.

I think that while it’s unlikely, it’s important to consider the fact that energy companies operate in a risky environment where errors can be extremely expensive. Exxon and BP have both suffered massive disasters that have had a huge impact on the companies, their shareholders and the dividend payments. It’s not a likely possibility but it must be considered.

Fit within your portfolio

No doubt, Chevron can be a good fit but it might be a good idea to add when you have strong growth but less stable companies. Chevron has tremendous assets and can be a rock within your portfolio.

Overall

So no, Chevron did not do as well as Intel (INTC) in my opinion in this analysis but I still think that it’s a solid stock to be included in most dividend stock portfolios.

I’m intrigued but happy about the Expedia (EXPE) spinoff

By: ispeculatornew | Date posted: 04.13.2011 (5:00 am)

It was a surprise to most analysts and I’ve gotta say that I was also surprised by the move. Expedia announced late last week that it was going to spin off Tripadvisor, as an independent company. For outsiders, Expedia is itself the result of a spinoff by IAC Interactive (IACI) a few years back, it is a group of internet travel properties.That certainly brings up a lot of interesting questions and after doing some research, here are some answers to go with them.

What is TripAdvisor?

I knew the answer to this one of course but since some of you might not. TripAdvisor is basically a community of travelers that have come together to review, rate and comment their favorite hotels, restaurants, things to see & do and much more in virtually every place worth seeing around the world. Many other properties have tried building something similar but nothing comes close to TripAdvisor in my opinion mostly because of the incredible community. The business idea behind it is to then help the users book the activities gaining a cut in the process while also selling advertising.

Why is it being spun off?

As this is a move done by Expedia, I think it’s important to consider their point of view. The most likely explanation is that the board has been unhappy with its valuation and that makes sense given the multiples that some competitors such as Travelzoo have been able to generate. The easiest way to “realize” the value of what they consider to be an “undervalued” asset” is to sell it. In this case, Expedia has decided to simply spin it out which might actually work. The stock did rise 14% which would tend to indicate that it was right.

That being said… wasn’t there another way?

I’m sure there was and doing a spinoff for that reason seems a bit extreme. But what’s done is done right?

Are you happy about the spinoff?

No doubt, I’m thrilled. I do see a lot of value in TripAdvisor because it has a strong community and is a good mix between social and commerce/travel. I think the company could end up doing very well. Also, the internet travel category which has already provided many good trading opportunities now has one additional stock and that means I will have more trading opportunities

Long TripAdvisor & Short Expedia (EXPE) ?

That is certainly a possibility, at least for a long term trade. I think the user loyalty towards Expedia is very very low compared to TripAdvisors’s and that will certainly have a long impact.

Will you be buying Tripadvisor as soon as it is spun off?

No way. I still want to find out more about TripAdvisor’s financials and there will be other parts of Expedia that will be included in the new group. Tripadvisor did claim 15% of Expedia’s revenues last year and grew those at 38% which sounds like a lot but I would actually expect more from this property.

Disclosure: No position on EXPE, short IACI

Dividend Analysis: Intel Corporation (INTC)

By: ispeculatornew | Date posted: 04.12.2011 (5:00 am)

It’s a fact, many tech companies currently have loads of cash at their disposition and despite some investors asking to get that cash back, companies like Google (GOOG) and Apple (AAPL) have so far refused to play along and start paying out a dividend. There are companies that have started some of that cash to pay back shareholders and while Microsoft (MSFT) remains the big tech name to be mentioned by the media when it comes to tech companies that pay dividends, many have started buying up Intel Corporation which recently increased its dividend yield above the psychological 3% level.

What is Intel? It’s a company that design, manufactures and sells computer components such as microprocessors, chips, etc. These products have been around for a long time but as Intel remains the leader and as chips become available in different types of products such as cars, electronic devices, phones, etc, things are looking bright for Intel.For some of these segments, Intel did not have all of the expertise but in those cases, the company has generally been quick to react by either catching up or buying out these smaller competitors.

Without further wait, let’s take a deeper look into Intel (INTC) as a dividend stock based on the 20 things that we consider when analyzing dividend stocks.

Dividend Metrics

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No doubt, while the 3.02% dividend yield is not stunning, the growth over 1 and 5 years truly is and it certainly makes Intel a prime candidate to build a solid and growth oriented passive income portfolio.

Company Metrics

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Again, sales growth has been strong and while it’s not as impressive over 5 years, keep in mind that this covers a recession. I do expect the growth to remain at around 10% in the coming years.The earnings growth has been very solid, the P/E ratio is very reasonable, margins are improving… Sounding too good to be true? Wait, it gets better. The company has a payout ratio of around 30%, meaning it keep up the growth for many years even while it continues to put significant amounts into R&D (which is critical to remain competitive in the long term). The company has a strong return on equity and basically no debt…. In my opinion, the company metrics are even more impressive than the dividend metrics (which were already very solid).

Stock Metrics

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Industry Metrics

I would consider these to be strong as the industry continues to display growth and while there is some competition, it’s still a fairly good scenario for Intel. I do think the main threat remains having a smaller more efficient competitor that could innovate more efficiently than Intel. It has not happened so far but it’s certainly a threat.

Fit within your portfolio

Personally, I think Intel fits into just about any portfolio. There are few solid dividend payers in the tech sector and those that are run businesses that are vastly diffierent from Intel. As well, the company should perform above average in economic downturns given the growing demand for data processing in Western economies.

Overall

I think Intel (INTC) is one of the best dividend candidates we have looked at in some time both in the short and long term. It’s a great fit, a promising even though established company and can bring growth to your passive income as well.

Long & short trades against the index

By: ispeculatornew | Date posted: 04.11.2011 (5:00 am)

One of the subjects that I get the most questions about is the method I use for trading technology stocks; long and short. I have written about it in the past and certainly have been fairly broad when discussing it which has generated more questions.

Last week I was asked what to do when I couldn’t find a “pair trade”. What did the reader mean? Simply that if you want to buy “Google” but cannot find a similar stock that you’d like to short against it, do you have any options ?  Of course, the answer is yes. This type of situation occurs very frequently for long and short traders. What I have usually done in such cases is simply do pair trades against stocks that are not as “fit” to be paired together. That is certainly one option but there exists another way to do it.

Trade against the index

What if instead of trading on the fact that Google will outperform a company like Microsoft or Yahoo, you traded on the fact that Google will either outperform or underperform the general index? That is certainly an attractive option and there are a few different ways to do it. While you could trade mutual funds, futures or other ways, I think the easiest by far is doing the trade against an ETF. Why?

-ETF’s are very liquid
-ETF’s are generally easy to short
-Non-leveraged ETF’s generally have reasonable shorting fees

As to what ETF should be traded, it would probably depend on the trade. The most appropriate one for the trades we do here would probably be one that tracks the Nasdaq index, such as QQQQ. To be more specific, we could also use one that specializes in internet stocks such as:

HHH (internet HOLDRs Trust),
BHH (B2B Internet HOLDRs Trust)
IAH (Internet Architecture HOLDRs Trust)
IIH (Internet Infrastructure HOLDRs Trust)
IVY (Ishares Dow Jones US Internet Index fund)

All of these could be used depending on the exact trade. Why haven’t I done it yet? I’m not sure but expect to open one of these trades in the near future…

Different perspective

Of course, in my opinion, determining if a specific stock will outperform the index becomes a difficult decision to make. I would however feel much better about simply taking what I consider to be the most undervalued stock in the stocks that I follow and going long against the index. It will certainly be interesting to see how that goes.

Less volatile

In my opinion, trading against the index would generally be less volatile which overall might be preferable.

Do you have any thoughts on this?

Financial Ramblings

By: ispeculatornew | Date posted: 04.09.2011 (5:00 am)

I certainly received a lot of comments following yesterday’s post about being long China (Chinese Internet stocks) and short US (US Internet stocks).  What inspired that post was the video that you can see at the end of the post. Exaggeration? Absolutely. But makes you think doesn’t it?:) In the meantime, here are some great links from the past week.

6 advantages of dividend investing @ WhatIsDividend
Dividend stocks vs Corporate bonds @ TheDividendGuyBlog
Is the Gold rush over? @ TheBigPicture
Investing: 3 walls to watch @ BalanceJunkie
Spending for the CFA exam @ SmartFinancialAnalyst
Stock Picks: Hyperion Exploration @ BeatingTheIndex
Why Google now needs a COO @ Mashable
Apple and HBO are more similar than you would think @ TheIndependant
Why Apple is no longer a hot stock @ DailyFinance
Global Tactical Asset Allocation Q2 Update On Commodities @ ZeroHedge

Long term trade on internet stocks: Long China (BIDU, YOKU, SINA, NTSE, SOHU) & Short USA (GOOG, AOL, YHOO, IACI)

By: ispeculatornew | Date posted: 04.08.2011 (5:00 am)

In 2009, many of my most successful trades as well as my top pick from the stock picks competition were Chinese tech stocks and after a difficult 2010 year for most of the Chinese market, I think it might be a good time to consider opening a new trade. What would that be? Quite simply betting on China’s internet leaders and going short on the US ones. The reality is that I do think US tech stocks like Google will do very well over time but I do expect Chinese competitors to do even better.

Why Chinese stocks?

As I’ve said, this is not so much about being negative about US stocks, very far from it but rather about these companies being in a very specific and favorable climate. Here are the main reasons…

Internet population

No doubt, as the largest population in the world with over 1 billion people, the emerging Chinese economy is poised to take over as the top world economy in a few decades and with over 400 million internet users and growing (fast!!!), China is already the largest market in terms of users and while those users are not as attractive yet given their average lifestyle, they are catching up very quickly and China will certainly become the most attractive market in the medium to long term so I do expect Chinese internet companies to do very well as the market grows bigger.

Mobile

While smartphone and mobile devices are still growing fast in the US and Europe, it is a few worlds apart from what will eventually happen in China when the users start to convert their usage. That will happen very gradually and certainly in different ways than what happened in the US but I still think that the Chinese companies given their ties with local telecom corps will have a huge advantage and should be able to nicely leverage the explosion in the news/blogs/mobile/games and other emerging trends in China.

Govt protection

It’s not easy for US or foreign companies to do business in China. Google’s now famous “exit” out of China as it got tired of playing by Chinese rules is just one of many examples. Many companies like Facebook and Twitter are blocked at times or on a permanent basis in China. There are many reasons why but it certainly is a major help for a company like Baidu to not face much competition from Google, Yahoo or Microsoft. It makes it easier to focus on other important things like innovation, new markets, etc. Over the long run, this will give Chinese companies a huge advantage in what will become the most important market. Given the uncertainty when dealing in China, it’s difficult for US companies to invest much in terms of money or resources in China knowing they could get shut down at any moment.

Desire for national leaders

As great as things have been in China in the past 10-20 years, one thing that has proven to be a challenge is building up huge multinational companies that have strong brands accross the world like Apple, Microsoft or Google. Both the government and the Chinese consumers would love to see this happen and I personally think this will result in a few huge companies that like Baidu will then try to take their success abroad. Will it work? I am convinced it will work in at least a few instances even though it could take some time.

Ability to be “inspired” by US

Another huge advantage for the Chinese companies is that they can get “inspiration” from what is done in the US without having to innovate as much since those US corps cannot bring the services to Chinese consumers. This significantly reduces the R&D costs but also helps the Chinese corps focus on other aspects such as better attacking specific markets or needs.

When I say long term…

In my opinion this is not a 1 or 2 year trade but rather a trade that would be done over 5-10 years and given the swings that will happen, I would take a position that can sustain a 20-40% loss because it will happen at some point although I do think that over time this trade will end up being wildly profitable. Being short a company like Google over 20 years will certainly make you nervous at times but I think that it is worth the risk.

So what are the match-ups?

Long China

Baidu (BIDU)
Youku (YOKU)
Sina (SINA)
Netease (NTSE)
Sohu (SOHU)
Tencent Holdings (Chinese listing)

Short US

Google (GOOG)
AOL (AOL)
Yahoo (YHOO)
IAC Interactive (IACI)

Look for changes in leadership or fragmentation

Obviously as in any other trade, there are risks involved and here are the main ones that I would be very careful about:

Changes in leadership: If at some point either Google or Baidu is no longer the “leader” in its respective market, I would switch the positions. Remember this is about China vs US not about Google vs Baidu.

Fragmentation: Generally, there have been clear leaders in specific countries and I would want to be sure that the Chinese market will not split at some point with Baidu and other players taking their respective parts as that would kind of screw up the thinking behind the strategy.

WTO or other international laws: While the Chinese impose tough internet laws on competitors right now, it’s difficult for others to complain set their own laws because the Chinese companies do not really operate abroad much right now. However, when that starts to happen, you can bet that the Chinese govt will start feeling the pressure to relax its rules on foreign companies.

Any thoughts on on such a trade?