Archive for August, 2011

Facebook Is A Solid Investment Despite The Few Myths Out There

By: ispeculatornew | Date posted: 08.31.2011 (5:00 am)

It’s no surprise, I’m a big believer in Facebook, its future not just as a company and service but also as a business and in the fact that its current valuation of $100B or so, seen as outrageous by some is actually a bargain. I had an interesting discussion with Bret in the comment section of a recent post as he disagreed with the notion that Facebook was a solid business. His main argument was that Facebook was not diversified enough and mentioned his post about 4 investing lessons (not only is Bret a great and interesting commenter on here but he does have his own blog). Today I will answer that argument not only for Bret but all of the others that doubt Facebook’s value.

Myth #1 – Facebook Is A One Trick Pony: Interesting that Facebook is now being accused of that as up until recently, that was one of the main points of criticism regarding Google. First off, contrary to popular belief, Facebook has revenues from 2 very different sources. There is advertising of course (more on that later) but also credits. Increasingly, transactions are occurring through Facebook. It started as a “tax” on gaming apps such as Zynga’s but as more companies start to plan transactional features on Facebook, the credits part becomes an increasingly attractive business. Facebook credits are a virtual currency that makes it easier for users to spend online. They can give their credit card info to one party (Facebook) and then use acquired credits to buy other items. Facebook charges 30% to merchants and is making hundreds of millions per year through this.

Myth #2 – Facebook’s Advertising Revenues Could “Go Away”: Just this week, Facebook started offering advertisers the option of targeting by zip code, city and state as well as by all of the existing methods (job, school, interests, etc). Facebook and Google are by far the two companies that have the most knowledge about internet users and in the advertising world, that is incredibly valuable.

Myth #3 – Facebook Will Fade Away: I’m not saying that it will not happen eventually. However, after seeing Google come up with a product that was so well designed (Google+) and using its powerful network to promote it, I was one of those who said that Google did have a shot at competing with Facebook. A few weeks later, Google already seems to have lost its momentum and while it has tens of millions of users already, they are spending little time on Google+ making it even more clear that competing with Facebook will be a tremendously difficult task. Also, just think about all of those companies such as Coca-Cola and Nike that are spending millions promoting their Facebook pages. Do you think they would do so if they believed that it might be declining or that the risk was significant?

Myth #4 – Revenues Will Not Flow To Facebook: Over the last century, advertising dollars have always followed users from newspapers, magazines, radio, television and now the internet. Facebook is already making billions in revenues, has the most used service on the internet where users spend more time than anywhere else.  That will continue to translate into revenues

Myth #5 – This Is Another Dot Com Bubble: While some companies such as Pandora (P) remind me of that period with no profits and no clear plan to profitability, companies such as Facebook have been profitable for years and those margins are increasing constantly. Are valuations out of hand? I personally do not think so in most cases.

Is Facebook a sure thing? No, of course not. Few young technology companies are. But I would say that Facebook will be much more difficult to compete with than anyone else except for Google which is part of the reason why I think the risks involved are overblown.

How Long Will It Take Mark Zuckerberg To Become The World’s Richest Man?

By: ispeculatornew | Date posted: 08.29.2011 (5:00 am)

In last year’s Forbes rankings, which are generally the reference, Mark Zuckerberg ranks as the 52nd richest person in the world. It’s an amazing accomplishment for a 27 year old to rank on that list. The fact that he has decided to sign the Giving Pledge promising to give away at least 50% of his net worth to charity over the course of his life is truly impressive.

Think about it… Have you ever heard of a young tech prodigy that founded a company that had a great impact, that helped him become the world richest man. This man also signed the giving pledge as he, his wife and Warren Buffett are behind the effort to get this pledge signed by as many of the world’s billionaires as possible. I am of course talking about Bill Gates. How interesting it was to see Bill Gates interview Mark Zuckerberg as it seems so clear that Zuckerberg is following the Gates path.

Back to the question though. Is it realistic for Zuckerberg to hope get to the top of Facebook? In 2011, the richest man in the world is Mexico’s Carlos Slim with an estimated net worth of $74 billion!!! How far is Zuckerberg? Not that far I would argue.

Mark Zuckerberg is estimated to own 24.6% of Facebook, a company that will likely go public next year. Obviously, it is not clear what that stake is worth. However, many, like myself, believe that Facebook would be an incredible bargain at a $100 billion valuation. More likely, the company will be trading higher if revenues and earnings are in line with current estimates. At a $150 billion valuation, Zuckerberg’s stake would be worth close to $35 billion, putting him at #6 in the world behind Carlos Slim, Bill Gates, Warren Buffett, Bernard Arnault and Larry Ellison.

Still Short Of Slim’s $74 Billion

There is no doubt that getting to that first $37 billion will be much easier than the second part. It’s not as if Zuckerberg will be creating a second Facebook. However, I do expect the company to grow. He has been said to believe Facebook will become the first company to ever be worth $1000 Billion. That is highly unlikely. However, seeing Facebook become the most valuable tech company in the world is very possible. That would mean overtaking Apple’s $330 Billion market cap… if that happened, Zuckerberg’s stake would make him the richest man in the world (assuming the others remain close to their current values).

Can Facebook Truly Overtake Apple?

I think it would be difficult to justfiy how Facebook would pull this off right now because the company still has so much of its focus on user experience rather than revenues and profits. However, I think the possibilities are almost endless and risks are rather small for the leading social network.

What do you think? Will Zuckerberg one day be the world’s richest man? If so, how long will it take?

Short Selling Ban, Good Or Bad?

By: ispeculatornew | Date posted: 08.26.2011 (5:00 am)

Earlier this month, after several consecutive days of sheer panic, 4 European Governments ended up deciding to outlaw short selling on their financial securities. This was following impressive declines as rumors of high exposure to lower quality Italian and Spanish debt. Regulators and bank managers were putting out messages about these rumors and trying to calm the markets but those had been unsuccessful. What happened on that Thursday when rumors started emerging of a ban of short selling? The markets rallied big time finishing the day significantly higher with the run keeping up the next day.

It would certainly seem to have been a great decision to stop these vicious short sellers. But was it really?

Why Banning Short Selling Was A Good Thing?

Temporary Rise: There is no doubt that this puts upward pressure on stock prices. Why? Because not only do short sellers need to cover their position (buy) but it also gives confidence to current and future investors that the downward pressure will be much lower.

Less Rumors: While it is illegal to do, everyone knows that short sellers are very keen on having rumors (true or false) about their short positions. In the case of banks, the risk to the economy certainly exists as any run on a bank would create panic in the entire country and perhaps worldwide. Having a healthy bank go down because of such rumors would be tragic and dangerous.

Good In The Short Term But Bad Over Time?

Past Success: It is far from the first time that such temporary measures have been adopted and you will have a lot of trouble finding anyone who’s found that it has worked. Why?

Short Sellers Can Still Act: Through ETF’s or derivatives such as options, it is rather easy for those selling to keep the same exposure as they had even when a ban occurs.

Market Confidence: In many ways, moves like this are signs of panic by governments and regulators which is not good in the medium to long term because it scares off investors that prefer investing in “safer” markets.

Confidence In The Banks: Banks such as Societe Generale depend on confidence for much more than their stock price. Can you imagine all of their short term trades and off market funding requirements that are done every day. Any lack of confidence will cause some of their counterparts to either avoid trading with them or increase collateral calls. The main problem remains the issues (sovereign debt risk), not the short selling.

Reduces Market Efficiency: Short sellers can have a very positive impact in the markets in improving pricing efficiency. Through my own long and short trading for example, I try to determine under priced and overpriced securities. That is generally the case for short sellers as they usually have some other position going against the short.

End Of The Line Impact

I personally think that it will take some time to judge the results of this latest ban on short selling and by time I mean months or years. I personally disagree with the idea but perhaps if it is done for a very short amount of time in order to avoid panic, it could work well. What are your thoughts on short selling?

Is FTR the Britney Spears of the dividend world? Beauty Is Not Always Obvious From The Outside

By: ispeculatornew | Date posted: 08.25.2011 (5:00 am)

Every month, we publish a list of the top 100 dividend stocks and we always make sure to caution against using the list literally. Why? Because simply looking at a few numbers can lead you to big mistakes. I think every guy knows that some girls that are incredibly beautiful at first eye tend to have a lot of other downsides when you take a deeper look. It’s quite easy to walk downtown and spot a good looking girl but how do you determine if she is actually worth even getting to know? Every month, we invite all of you to sign up for our free mailing list where we look at a more in depth profile of these stocks in order to determine if they have the 20 things that we look for in dividend stocks but also if they have what it takes to be part of a sustainable dividend portfolio. Again today, I would like to invite you to join if you have not done so already:

What To Look For

That being said, the most obvious example of this fact is Frontier Communications Company (FTR) which month after month has been ranking at the very top of our top dividend stocks, with a yield that often approaches 10%. Some time ago, I wrote about FTR on the newsletter and why the stock was a poor dividend play despite its amazing dividend yield. I received a few comments regarding the fact that the company was turning it around, that its recent M&A activity would mean increased ability to pay a high dividend. The primary purpose of any good dividend portfolio is to avoid holding stocks that decline their dividend. It’s not a coincidence that many telecommunications stock like FTR have reduced their payout. Let’s look at the facts:

FTR pays a quarterly dividend of $0.1875
FTR made $0.06 per share in its most recent quarterly earnings, the same amount as the previous one

FTR is thus paying out 3 times more than it is making. While revenues are increasing rather quickly, because of its margins, earnings are not expected to climb very fast in the coming months.

How long do you think FTR will be able to keep up such payments? The company has a current ratio of 0.80 meaning it has more short term liabilities than assets.

Isn’t FTR the perfect example of a stock that looks great on the surface but with so many problems hidden underneath the surface? The Canadian stock Yellow Pages (YLO) is another great example of that and it recently announced a slash in its dividend.

Keeping A Long Term Perspective

By: ispeculatornew | Date posted: 08.24.2011 (5:00 am)

Over the past few weeks, markets have been moving around so quickly that gains of 5-10% can go away within a few hours. It’s not clear what is causing this. Sure, there are important worries about a few different things including sovereign debt. Will Italy, Spain or others end up being unable to pay their obligations and what would that lead us into (hint.. it would be very bad)? It’s difficult to get a clear image. Why? Because the speculation is about events that are several years away. If that is the case, how is it possible to explain that the market rises 4% in a few hours only to reverse the next day? What is different from yesterday? Did Italy, Spain and others find some treasure that will dramatically change their future? Probably not.

I always find it interesting when the media tries to explain what is happening in the markets.

Day 1 – “Markets jumped off a cliff over concerns that the European debt crisis will spread
Day 2 – “Markets move much higher after the Fed announces rates will remain low for 2 more years

Honestly, what is new here? Sure, there are a few elements and the Fed does give its impressions. But is that enough to dramatically change our long term perspective? I mean did anyone think the Fed was going to rise interest rates in the near future? Or that the Fed would tell investors it would stand on the sideline if required? It seems like every day the media would be able to explain an important rise or a crash.

The Truth

I personally think that the most important factor is that electronic trading have made all trading much more volatile, and any small movement can go significantly further than it did in the past? Why? Because these electronic programs often take decisions based on momentum so a 1-2% decline will be seen as a significant possibility of something bigger. Then what? These programs will start selling even more, shorting stocks in order to profit from the decline. It happens so quickly but with everyone jumping on the bandwagon, it does indeed help markets to move south.

How Do You Judge Action In The Markets?

Personally, I think it’s important to try to keep the big picture in mind. A 5% increase means nothing as does a 5% decrease. In dividend investing, I worry about the company’s revenues, profits and how those will grow over time.  Will Apple (AAPL) sell significantly more or less of its units in the next ten years based off of news in Europe today? It might make a difference, but 4-5%? Probably not no.

How Do You Act When Markets Are Crazy?

I have some friends that wait for these moments to jump in the market. Any significant drop translates into a big buying opportunity. Unless we get stuck in a Japan like scenario, that is likely to be true. I would simply caution to only put a portion of your savings to work. If the markets decline by 10% and you put everything in, are you able to support a 10-20% further decline? Or would you keep money on the side to put it in when that happens?

My Boring Perspective?

Personally, I do not worry about it much. A 5% increase or decrease will not have much impact, make me think that the market is overvalued, undervalued or make me create any drastic action. It does make things more interesting from a trader’s perspective but that’s just about it. So if you ask me what you should do following yesterday’s action on the markets. My answer will simply be: “Stick To Your Long Term Plan“.

How about you?

Is Exxon (XOM) The Giant Of The Dividend World?

By: ispeculatornew | Date posted: 08.23.2011 (5:00 am)

Exxon might have lost its title of the most valuable public company in the world to Apple, but since Apple (AAPL) continues to resist paying out any of its cash reserves back to shareholders, Exxon remains the biggest beast out there for sustainable dividend stock holders to consider. In Apple’s case, I think it’s fairly unanimous that despite its huge size, the stock remains undervalued. Is it also the case for Exxon (XOM)? As is usually the case, we will evaluate Exxon using the 20 things we look at when judging dividend stocks and also look at the sustainability of the company.

Dividend Metrics

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There is no doubt that Exxon has a very strong profile here. While its dividend payout of 2.5% or so is not spectacular, it is solid and has been increasing quickly both over 1 and 5 years.  How long can Exxon (XOM) keep increasing its payout like this? Let’s take a look.

Company Metrics

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When we consider Exxon’s size, it’s very impressive to see that sales and earnings per share have increased so much in recent months/years. The P/E ratio is fairly cheap considering Exxon’s growth and the payout ratio under 30% signals that Exxon could keep increasing its payout for years to come. It has an incredibly strong balance sheet as well with virtually no debt, which is impressive considering all of the capital requirements of running a business in the oil sector.

Stock Metrics

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Industry Metrics and Sustainability Factor

This is where things get very interesting. There is no doubt that Exxon’s performance is highly related to the price of oil. Oil has suffered a severe correction in recent months as the economy continues to suffer and its unclear what its short and medium term prospects are. I personally still think that oil will continue to increase over the next few decades simply based off of demand and supply but that could always turn out to be wrong.

As the biggest oil stock in the world, Exxon has tremendous power when it comes to negotiating with all of its partners and that is unlikely to change in the near future. How will Exxon’s position in the world change? It’s difficult to say but it is likely to change dramatically in the coming decades. First off, as oil becomes more rare, Exxon is likely to become even more profitable as prices go through the roof. However, any significant development in renewable energy that Exxon does not have a big part in could threaten its long term ability to make cash. I don’t think that is likely to happen for a very long time. I would personally consider Exxon to be sustainable in the long term but as I had mentioned, I do not believe in buying any stock “for life” so that situation might change at some point during our lifetime.

Fit Within Your Portfolio

I can’t think of any reason why Exxon (XOM) would not fit in your portfolio. It offers a solid dividend yield, excellent growth, an incredibly strong balance sheet that keeps getting better. I would not want a high concentration of oil stocks simply because of their correlation with the price of crude oil but I personally would want to hold XOM in any passive income portfolio. What are your thoughts on XOM?

Mark Cuban Calls Out Wall Street, He’s Wrong On This One!

By: ispeculatornew | Date posted: 08.22.2011 (5:00 am)

A disclosure to start off: I admire Mark Cuban! He emerged in the dot com bust after building a website that he ended up selling near the top thus avoiding the downfall that many other Silicon Valley stars endured. As if that wasn’t enough, he used the money to buy his own NBA team, the Dallas Mavericks, winning his first NBA championship last year when he defeated Lebron James and the Miami Heat in the final. He continues to make tech investments mostly as angel/private investments. To say that he is living the dream life would be an understatement. He did not build this through luck, he is brilliant and has many “outside the box” ideas such as his post about restarting the US economy.

That being said, a few days ago he wrote about diversification and called it a Wall Street fabrication in the same way as “buy and hold”.  I think that if he had specified that he was talking about “sophisticated investors”, that might have made sense. But saying that the average American should both avoid buy and hold and diversification sounds crazy to me. Those are certainly not perfect methods to invest, far from it. But my question would be, what are the alternatives? The example he gave was a good one but that would be an argument about what a diversified portfolio should include rather than the benefits of actually doing it. What is a sophisticated investor? Someone that not only understands the markets very well but also can afford to lose a large percentage of his money. What exactly is Mr. Cuban suggesting? Buying 4 or 5 companies that we believe in? That sounds like a recipe for disaster if one of those happens to be the next Enron, Lehman Brothers, etc. I don’t think you need to hold 10-15 ETF’s either but there’s a major difference between those two solutions.

Buy and hold and diversification remain the best option for most of us and that is even what I use for my retirement account while my speculative stocks bucket use stock picking a lot more. If we consider the fact that a diversified buy and hold portfolio with low fees (ETF’s!!) will beat 70-80% of managers at a minimum, what is this better investing idea?

What are your thoughts on diversification? Am I the only one to disagree here?


New Stock Pick: Long Google (GOOG) and Short Ebay (EBAY)

By: ispeculatornew | Date posted: 08.19.2011 (6:00 am)

As I had discussed earlier this year, one of the chances that I’m doing to my trading method is no longer starting any new trades past August., you can read about the reasons here. Therefore, this could very well end up being my last new trade of the year. I will of course still be posting my opinion on many of the stocks that I follow as well as dividend stocks. Because of that fact, it is somewhat fitting that my last trade could be going long Google, which has been a stock I have relied on quite a bit in recent years. It’s not been a stock that I have been as successful trading as some others but still, it remains one of my favorite stocks/companies.

Before going further, let’s take a look at the numbers that we used this time around:

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Long Google (GOOG)

It’s no secret, I’m a big fan of Google and while I’m not sure how its latest move will impact the company, I do still think the company has a lot of growth left and if buying Motorola was an important step in securing Android’s future, then it was a brilliant and necessary move. Will the current economic uncertainty impact Google? Absolutely but I do think it does still have more medium and especially long term growth than the stock I am pairing it off against eBay (EBAY) despite the fact that they trade at virtually the same P/E ratio.

Short eBay (EBAY)

By almost any measure, I’m a big believer in eBay, especially in its banking business otherwise known as Paypal which seems destined for greatness and many more years of strong growth. That being said, because of the size of its other businesses, eBay has been unable to deliver as much growth as I would have expected and hoped for.

The Basic Idea Of This Trade

In terms of trading, this is a very simple trade. I’m simply trading two two stocks that are trading at very similar valuations but I believe a lot more in the growth of Google (GOOG) despite the fact that it is spread out and has so many competitors.

Disclosure: No positions on Google (GOOG) or eBay (EBAY)

Holding Dividend Stocks For Life…Illusion Or Reality?

By: ispeculatornew | Date posted: 08.18.2011 (5:00 am)

I always find it interesting when authors post about dividend stocks that can be held for life. How is it possible to know what a company will look like 20, 30, or even 50 years from now? It blows my mind. I understand the fact that it makes an attractive headline that can bring in a lot of visitors. Who wouldn’t want to take a few minutes of research to find a stock that can be held for several decades?

Don’t get me wrong, I would love to be able to determine a stock that should be owned for the next 50 years. I would also love to have money growing on trees but that doesn’t necessarily happen. Buying stocks like Coca-Cola (KO), Proctor & Gamble (PG) and ,any of the dividend aristocrats would surely have been a winning strategy, no doubt about that. It is much easier to take out such examples after the fact however.

I’m not saying that long term investing can’t work, far from it. I strongly believe in long term investing and have been working on my dividend sustainability set of criteria. These are all built with one clear objective: Finding long term value stocks is not that difficult and we do a lot of such research both on the blog and in our newsletter. Would I consider those stocks good for my entire life? No. However, they hopefully will turn out to be just that. Stocks that have strong balance sheets, strong brands, that are able to increase sales, earnings and dividends every year and should be able to do so in the short to medium term are stocks that will hopefully be great dividend plays for decades to come.

Is it possible that the difference between what these authors describe as “life long dividend stocks” and what I understand is simply in the meaning? Very much so. To me, saying that you are buying a stock for life means that you do not need to look back on the purchase and re-evaluate the stock every year, that you are ready to go on “auto-pilot”. I very much think that every stock should be re-evaluated every year. Chances are that quality stocks will make the cut for several years. I would not just automatically assume that it will though.

Is it just me?

Closing Trade (TZOO, DMD)

By: ispeculatornew | Date posted: 08.18.2011 (3:55 am)

It has certainly been an amazing year so far and while our annualized return still stands strong at +138%, this latest trade was not a success. The trade had almost been closed recently but an intra day rebound by Demand Media had helped it escape its stop loss point. Yesterday’s 10% decline in Travelzoo proved too much though and the trade will be closed this morning, it currently stands at -27%!