Wednesday, August 26, 2015

Stock Investing: What to buy NOW

[Investor Ralph Wagoner] likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog's owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he's heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.                          How stock markets work, as recalled by Bill Bernstein

This is an unusual post.

As my regular readers know, I generally shy away from specific stock recommendations in this blog as I feel strongly that most individual investors are best served betting their money on their own experience and expertise. I have unwaveringly advocated buying the stocks of companies in fields those individuals already know and understand-- or at the very least, of companies they know from their own experience as consumers. But today, in violation of my self-selected and self-policed restrictions, and at great risk to your future readership (if my predictions prove inaccurate), I will tell you what I think are great values right now.

At this moment, as the S&P 500 index is down precipitously from its May 2015 highs (though up again some today), value opportunities have presented themselves which are too good to ignore. To be fair: these are companies whose stocks were down by their own doing prior to a week ago when the correction began, and which have been dragged down further by the broader market rout. Yet these are businesses which I believe in and which should provide real gains in the coming years. Two are smaller, growth oriented businesses, and two are ultra large-cap blue-chip stalwarts. I present them here in no particular order.

    1. Twitter 

Twitter (TWTR) has had problems for some time now. The company recently reported stagnant user growth, largely due to an interface which many find difficult to use and a lack of top executive leadership: 5-year CEO Dick Costolo resigned early this summer amid a rash of concerns, not least among them investor frustration with the shrinking valuation of this once high-flying tech Silicon Valley darling. Twitter founder and ex-CEO Jack Dorsey immediately stepped in as interim CEO, and many are calling for his leadership to continue permanently (assuming he can find someone to replace his role atop his other startup, Square). 

But Twitter seems now to be hovering on the brink of resurgence. In June an angel investor in the company, Chris Sacca, published an 8,000-word screed entitled What Twitter Can Be. Though a tiresome read, the document presents what many believe will become a sort of blueprint for Twitter to follow over the next several years as it corrects its leadership issue, improves ease of use and begins to harness the massive power of over 1 billion registered users-- of whom only about 300 million are actively engaged on the platform exchanging breaking news, photos, opinions, and open dialogue in real time. As I write this, Twitter's revenue is rising even as its stock has fallen to about 5% below its IPO price of $26, presenting a singular opportunity. 

Always buy what you are comfortable with: your understanding of the businesses you own is paramount to your ability to accurately assess changes. 
  2. Apple

Apple retail store, Hangzhou, China
It is the largest company on Earth by market cap, more than 50% bigger than the closest competitor. Just about every investment portfolio contains at least a few shares of this over-exposed but widely-loved company. Nonetheless, Apple (AAPL) has shown itself to be increasingly a one-product business, as its iPhone is now responsible for over 60% of its total revenue. As such, shares are 20% discounted from their record highs a few months ago, not least due to concerns about the seeming collapse of the Chinese economy (China is now one of Apple's biggest customers). 

Apple has become a victim of its own success: Apple investors grew accustomed to one industry-altering mega-hit product after the next and the staggering market share and revenue growth that accompanied them. Beginning with the iPod and iTunes Store in 2003, the company first changed the way people bought and consumed music. Then with its original iPhone in 2007, Apple upended the mobile phone business, ending the dominance of Blackberry and Nokia and Sony with an exclamation point. Finally Apple made even its own laptops look old-fashioned as its 2010 iPad ran rampant over previous technologies and effectively darkened the only bright spot in the personal computer business. Now its just-released Apple Watch is winning some early adopters, though most believe it cannot and will not wallop the market like preceding products. 

But just because Apple will not continue to grow and change industries as in years past does not mean the company is cooked. Far from it: Apple has perhaps the most loyal customers in all technology, and they will both need to replace their myriad devices over time, and will continue to look to the iTunes Store for music (often subscription-based purchases likely), apps, and movie rentals in the future. Additionally the second version of the Apple watch will likely be a bigger hit than the first, and Apple is moving sharply into both the live television and the payments businesses over the next few years, not to mention rumors of an electric Apple car one day. At a price-to-earnings ratio of only 12 and a price-to-sales ratio under 3, with some of the best growth rates of any major global business, in spite of its size, Apple looks like a steal at today's prices.

    3. Zillow

When consumers want to know the price of the house up the street that just went on the market, or they're thinking of moving across town or they're weighing a job offer that requires moving to a new city, there is only one place they look today: Zillow (non-voting: Z, voting: ZG). Zillow's stock has taken a beating this year as the company spent heavily to acquire their only significant competitor, Trulia, then spent substantially more to merge the two companies' complex software systems. But there is absolutely nothing wrong with the underlying business as its revenues, largely from the advertising of real estate agents, keep climbing and its user base keeps growing. Zillow is expanding into new markets as well, including rental data, mortgages, and virtual 3-D online display of listed homes. Now, with already a profitable and well-known brand and without real competition, as soon as the merger is fully in the past this company is going to blow the doors off. You'll want to be on board. 

    4. Disney

The entertainment conglomerate has taken a pounding since it peaked in late July of this year, but unfairly so. When Disney (DIS) reported earnings August 4, it called out a drop in ESPN cable sports subscribers and since then has been playing defense against the Wall Streeters who are concerned that ESPN, which provides the bulk of Disney's cable segment revenue, will not be able to regain lost sales given the "cord-cutting" trend which has taken a toll on nearly all media companies and cable providers. But those fears will likely not be realized: it is more likely that even now Disney is working on a standalone ESPN app to allow those with internet but without cable TV in the future to continue to tune into their favorite teams, a strategy which has worked well for HBO, Showtime, and Amazon, not to mention Netflix. In any case, Disney has a multitude of very healthy businesses upon which to fall back. 

The cast of the new Star Wars movie. Kidding, I'm kidding.
For starters, there's the eponymous theme parks, which are doing extremely well and (in the U.S.) are expanding to accommodate new, substantial Star Wars-themed attractions. Everything else aside, the opportunity to immerse oneself in a Tatooine universe of characters and experiences, not to mention to experience personally piloting Han Solo's smuggler spaceship The Millennium Falcon, is all but a guarantee of strong theme park revenue in the years to come. Disney's multiple film-production business are crushing it as well, with Marvel superhero pictures continually ranking among the biggest hits worldwide year after year and its Pixar films scoring with audiences young and old each and every time out of the gate. Then there's the avalanche of merchandising for the hundreds of Disney cartoon and film characters, including video sales, toys, games, and clothing. And we haven't even touched the big one: Disney's release of a new Star Wars film, the first in a decade and the first of three to come, in late autumn. Even those who aren't fans of the films are expecting lines around the block for days in advance of the opening. 

Disney is the sort of company you want to buy stock in and leave to your children. It's a feel-good, crowd-pleasing, family-friendly media juggernaut currently experiencing a fire sale on its stock. Load up and forget about it for decades. 

There are several more great opportunities I could include here for your consideration: Starbucks (SBUX), Under Armour (UA), LinkedIn (LNKD), and GoPro (GPRO) among them. All well-priced and all with substantial growth ramps ahead. I'll let you to do your own research on those, just as you should on the ones I discuss in more detail above. Always buy what you are comfortable with: your familiarity and understanding of the businesses you own is paramount to your ability to accurately assess changes in their operations, management, financial structure, and the competitive field on which they play. 

As I wrap up this post, I note that (of course) a bit of the pricing value I discuss above has evaporated in a roaring market comeback today. Not to worry. The 4 companies I've detailed will see dark days again tomorrow or next week and many times over the coming years, which is how it goes for publicly traded companies which have wide consumer awareness and attention. Your job is to start walking, ignore your pooch and keep your eyes to the northeast.

Monday, August 24, 2015

Stock Investing: Bloody Hell! Now what?

Damn, it's ugly out there.

This is it, the big market drop we've been expecting ... I think. Of course it depends how long it goes on and how far it falls. But we've been told for months (years, if you actually listen to the perma-bears) that the crash was coming. Or, the correction. Or dip. This is what we think now. We don't know anything until afterwards. A lot of folks on TV and their blogger equivalents will tell you what they're reading in the tea leaves, or what the historical charts indicate about today, or what we can glean from historical data ... yada yada yada. They're blowing smoke, folks. Anyone who says they know what we're looking at right now, or exactly why, or what's going to happen next, is lying. It's always different this time, and only hindsight is 20/20.

No one knows what the market is going to do, or even what to call what it's doing now. No one. Those questions simply cannot be answered in good conscience, even when one is well paid to answer them. So stop listening.

The only question we truly can answer is, What do I do about it?

Easy: Don't do anything. Yet.

I know you want to panic, sell it all, put the cash in your mattress and keep it safe from harm. But here's the thing: if you do, in many cases you'll be selling below your cost, which means means you will have bought high and sold low, which is an somewhat undesirable outcome. You will lose actual dollars-- different from theoretical dollars represented on a brokerage statement. Why? To "protect" your money.

Understand that in most cases there is nothing wrong with the companies you bought. Sure your holdings-- your share of ownership-- are in the red. But the businesses and their operations are fine: they are churning out quality products which are selling well and they're making their debt payments and taking care of both their employees and their customers-- which takes care of their owners. Nothing wrong. Their stocks dropped because all the other stocks dropped, and all the other stocks dropped because most investors panicked and sold.

Don't be part of the problem. If you sell you might prevent further losses. But markets are cyclical, they go up and then down and then up again. When will you get back in? You'll be looking for a signal that the rout is over, that we've hit bottom and it's safe to buy. But there is no signal. You will absolutely, with 100% certainty, miss the bottom. And likely you will miss the first good chunk of gains from the bottom as well because you won't be convinced that the turn is real and the worst is past. You'll want to see several days of strong market gains-- and that will be your signal. But those gains will now be behind you, and you're still holding the losses you took on when you sold due to panic. The whole selling-on-a-downturn thing is a trap. Don't fall for it.

Instead, hold on tight and get ready. Hold on because it could be a long and nasty ride down, with heartache and headaches and maybe an ulcer or two, given your investing time horizon. Get ready because soon it will be time to buy more of the companies you believe in. Because like I said, there's nothing wrong with them.

Next post, I'll break protocol, and provide you some specific suggestions. Stay tuned.

Drifting to Fifty | Random unrelated nugget of the week
Learn a sport you can play even as you age: golf, skiing, tennis, swimming, biking, hiking, even billiards or table tennis. Then learn another. The goal is to find something you love that will keep you on your feet and active the rest of your life. Your spouse will thank you.

Monday, August 17, 2015

Stock Investing: Your Biases Will Kill Your Returns

We all make judgments, big and small, on a constant basis: I'm pretty sure my car can fit in that space. $30 should be more than enough to spend on a gift for my nephew. Acid rock has no musical value. Not one of the political candidates in the race is worthy of public office.

All the time, every day, we have to gauge our options and make a choice. And we believe we are generally being rational, that we have given considered thought where appropriate. That we've assessed the available data and decided based upon sound, rational analysis.

But we haven't. More often than not, our emotions and our patterns are guiding those judgments from the shadows. This is as true in investing decisions as it is in ordering dinner. But for most of us it turns out to be much more expensive.

Recency Bias occurs when a memorable event in the immediate past colors thinking and decision-making: shark attacks have always been quite rare, but highly public recent shark encounters sway beach-goers to stay out of the water. For investors, a long bull market irrationally affects thinking about future market performance, making success seem inevitable. Or devastating losses after a market crash in the near past keep otherwise sensible investors from buying in.

To ensure you are not falling victim to recency bias, look further back than your own experience. Investigate a stock's history going back 5, 10, 20 years. Look at its industry and even the broader market over a longer span. In the longer view, any recent event seems relatively insignificant.

SodaStream's failed campaign, SuperBowl 2014
Loss-Aversion Bias is the idea that a stock in your portfolio which has declined since purchase should not be sold, because it "will come back up." Perhaps it will, in fact, return to and above your purchase price. However, converting what is currently a "paper loss"-- as the lost value exists only on your brokerage statement-- to a real loss by selling the stock at a lower price is fundamentally repellant; the human psyche often rejects as impossible those things which appear uncomfortable or painful, or dangerous. (see: Sodastream 2014-2015. Ugh.)

Getting around loss-aversion bias is a less obvious path. Typically we have to first disassociate our emotions from our stock holdings, no easy trick. (Do you own Apple? Netflix? Have you held them a couple of years? Do you love them? Then you take my meaning.) If you are successful in divorcing emotion, you need to get into the reeds on that devalued stock you own: are all the reasons you bought it still true? Products solid, consumer perception on good footing, management seems to know what it's doing and communicates that to shareholders? Does it still have a strong competitive position? Does it still have cash? If these are all true, then perhaps you are correct, and the stock will rebound and maybe you should pick up some more of it. If not, however, you'll need to do some more digging: the market clearly disagrees with your assessment.

Confirmation Bias is very common but virtually impossible to self-detect. It is the tendency to subconsciously run incoming information through a preexisting preference filter, such that we confirm what agrees with our beliefs and reject what does not. This can lead to the rejection of material events, such as the deterioration of a company's product pipeline or their executive decision-making. Or defending a sizable new acquisition in a seemingly-unrelated field, or taking on substantial debt when previously the company was self-sustaining.

3D Systems' magnificent, colossally unpopular 3D printer
This is not to say that no corporation can adjust to or recover from such events, as these things occur all the time even in very strong companies with fast-rising stocks. However, to counteract confirmation bias we must undertake objective, detached examination of any developments which materially affect stock value. Sometimes a down stock doesn't come back up, it just goes down, and down ... (see: 3D Systems. Ahem.)

Overconfidence Bias is, just as it sounds, the idea that we have an edge where others do not. It stems from success, sometimes from success in completely unrelated areas. (The fact that you were a 300-level astrophysics T.A. in in college does not make you a better stockpicker.) Did you or someone you know feel really smart about their big tech stock bets at the end of 1999? Do you remember how smart they felt in summer 2000? 

The only way to overcome overconfidence is by questioning yourself and your data on a constant basis. Though getting crushed a few times will also get the job done. Few who've been stock investing long term can honestly say they've never burned themselves from sheer hubris.

Action Bias is my personal favorite. Put simply, action bias is the tendency to do something, really anything, when the most appropriate response is to do nothing. No doubt you know all about this: ever thought about getting off a clogged freeway in favor of surface streets which you suspect will be no faster-- but at least you'll be moving, right?

Action bias gets everyone at one time or another. China's economy is slipping, ISIL took another city, Greece will default, the Fed will raise rates: Time to cash in and get out of the market before it all goes to hell? Disney stock falls hard on quarterly earnings news: Sell it? Buy some more?

About 80% of the time, the correct reaction in these moments is to do nothing at all. You did your research early on, before you bought each of your companies' stocks. You say you're in for the long haul, meaning 5-10 years or even more-- this is the kids' college tuition, or retirement funding. As a rule, never make long term decisions on short-term news. Do you think Greek debt will still be in the daily news 5 years from now? Will China's economy still be a shambles? You chose Disney, a quality company; will it have righted itself in 10 years time? If you are indeed doing careful analysis at the beginning, then once you own the company (that's what it is, after all) you must trust the managers that work for you, and trust your own (previous) judgment.

And really, it's all judgment. Stock picking and stock investing is more art than science, no matter what you read about uptick volumes and Fibonacci retracement and resistance levels. No one knows what an individual stock is going to do, never mind the entire market. So do your homework, place your bet, pay attention, guard against your own bias. And you'll do fine.

Tuesday, August 11, 2015

Stock Investing: Financials, Part II

When I left off discussing the numbers of a company you’re interested in adding to your portfolio, almost a month ago (sorry), I told you about some broad checks I do to ensure the company is in good shape, like Return on Equity, PEG Ratio, Total Debt, and 52-week Price Change. Now let’s drill a little deeper. Like in my previous Financials post, this information is all available and free for the taking, in Yahoo Finance.

First let’s look at the Current Share Price. This is not meaningful in and of itself--- a share can cost $10 or $200 or, in the case or Berkshire Hathaway A shares, over $215,000 apiece. Share price is not an indicator of value, though obviously there are few among us who have the cash to pay for a Berkshire A share. The only thing we care about the price of a stock is whether it’s not too inexpensive; we want to avoid “penny” stocks, which naturally are those under $1 per share, and anything too close to that level.

Penny stocks often are that price for a very good reason. And while there are those who like to dabble in stocks with tiny prices (5,000 shares for under $1500!? What a deal!) the truth is usually that something terrible has happened to the company and it is in danger of not only bankruptcy, if it’s not there already, but of being dropped, —delisted— from the major trading houses. Which means it becomes very hard to sell, even if the prices rises some. And more often than not, the prices stays down and even becomes worthless. Have you heard of or

I like to find companies whose shares trade above about $7, which is most of the companies we’re talking about anyway. Less than that is just too close to the line for me and in those cases I frequently cannot get enough reliable information about the company, so I can’t make an accurate assessment of its market chances.

Market cap
Next up is Market Cap, or Market Capitalization. This is simply the total value of all currently outstanding shares in the company. Unless you know a founder or you’re in some other way personally very familiar with a particular company, I would urge you to keep your investments in companies with a market cap of at least $2 billion. Again, like share price, it is merely an indicator that the company has been around long enough, and available in the public markets long enough, that you—like any analyst or journalist or curious customer—can easily locate solid information.

Insider Holdings is a very useful metric, available of the Yahoo Finance Major Holders page. It tells you what percentage of the outstanding stock is held by founders or executives of the company. The higher this number the better. We want to invest in businesses whose leaders ride in the same boat we do and so are generally motivated by the things that we are. In most cases an executive with ownership of 1% or more will be incentivized more by his or her share ownership than a pay package when making key decisions which affect that business. Not to mention someone who owns that much of a big, publicly traded company likely has a passion for that business and will work extremely hard to see it succeed. Precisely what a passive shareholder wants to see.

Revenue Growth and Earnings Growth:
(For these you will, unfortunately, need to start calculating. This is where that Excel spreadsheet comes in handy. I just copy-paste a company's Balance Sheet, Income Statement, and Cash Flow Statements right off the web and onto a worksheet, then I can build formulas to track my metrics.)

What we want to know here is how quickly Revenue and Earnings— profits— are growing on an annualized basis. And I weight my figures so that last year and this year are getting more say in the rate calculation than 2 years ago. Here’s the formula for Revenue Growth:

      This Year Revenues                          This Year Revenues
      ------------------------------  x .65      +     -------------------------------   x .35   - 1
      Last Year Revenues                          2-years ago Revenues

and for Earnings Growth:

       This Year Earnings                           This Year Earnings
       -------------------------  x .65      +        ----------------------------   x .35     - 1
       Last Year Earnings                           2-years ago Earnings

Ideally, we want a business where revenues are rising at least 10%/year, and earnings are growing even faster than that, preferably more than 20%/year. Of course, there are some outstanding exceptions: Amazon, for example, has astounding revenue growth and virtually no earnings at all most of the time, as nearly everything is reinvested into the business to maintain massive growth… it’s a choice which, as a growth stock investor, I’m totally happy with. 

Relative Strength is a measure of how much the stock’s share price has risen in the last 6 or 12 months relative to a given set of other stocks—in other words, how much faster a particular stock is rising compared to others. The idea is that this is an indication of management skill or profit margins or manufacturer efficiency. The reality is that while it could indicate any of those things, likely as not it’s more a measure of what we now call “trending,” or the level of investor interest in a given company. A business that is hot in the market lately will likely have seen a greater price increase relative to its peers than another business. In any of these cases, we like fast price appreciation and we look for it.

It is an impossible number to calculate, as you need to determine the price increase rates of a whole pile of other stocks and then compare to the one you’re researching. Best bet: search for it online. Use the ticker symbol (AAPL for Apple, NKE for Nike, etc.) and then look for Relative strength. Often you can find some analyst’s take on the first try.

Finally, Cash Relative to Total Debt is just what it sounds like: how much cash and other liquid assets the company has on hand compared to all their debt. We want cash on hand to be the larger number—preferably 1.5 times bigger. To be fair, this pretty much rules out a lot of manufacturers and other capital-intensive businesses, such as airlines and shippers and so on. But you want to know regardless: can the company pay off debt anytime should a need arise?

Of course, there are many more ratios and calculations you can perform to help you determine your company’s strength, cash flow habits, financial priorities, growth rates and profitability. I urge you to play around on a couple of websites in addition to Yahoo Finance that are great for this sort of exploration:

The Motley Fool offers a wealth of information just by typing in a company ticker to the top-right corner search field of their home page, including common ratios (most of those listed on my blog), charts and graphs, and some comparison tools as well.

Nasdaq provides data about just about any stock traded in the U.S., both in and out of the Nasdaq trading exchange. Their home page has a search bar to enter any ticker you want and get, on the left margin, a page called Guru Analysis which will rate a particular investment opportunity filtered through the philosophy of a number of renowned investors, such as Benjamin Graham and Peter Lynch. And you’ll find a quick and easy visual guide to their own analysts’ take under Analyst Report.

Drifting to Fifty | Random unrelated nugget of the week
Short-term thinking— a need for instant gratification— is the source of a great number of our problems. If instead one approaches a consequential decision from the perspective of how her or she will feel about that choice a year from now, or 10 years from now, one will likely find greater satisfaction.

Monday, August 3, 2015

Stock Investing: Surrounded by Bears

I hate financial television. I loathe it, can't stand it, utterly refuse to watch. Because turn on any business news channel-- Fox Business, CNBC, CNN Money, you name it-- and there's a guy in a pricey suit telling the camera that the stock market is too high, he's never seen such lofty valuations, the bull market is over, get-out-while-you-can-'cause-it's-all-coming-down.

Perma-bears everywhere
These market bears are everywhere, all around us, at all hours. They write newspaper columns and well-publicized blog posts and they turn up on talk shows and on radio. They speak with total conviction. They come with fancy Wall Street credentials and years of experience and seemingly accurate past predictions. And they know, they just absolutely know that the S&P 500 will fall any day now. The war in Syria/debt default in Greece/stock market rout in China/nuclear talks in Iran/election uncertainty in the US will cause a massive market selloff. You'll lose your life savings.

And they are totally, completely, utterly full of it. All of them, completely 100% nonsense. They know nothing. It is your job-- it is your duty to ignore them.

Dire warnings: Michael Sincere
First of all, no one knows what the market will do. A crash is a random and irrational event. It's a public hysteria confined to the equities market. Saying there will be a big drop is like saying a bee will fly up your sleeve. Of course it could happen, but there are no precedents, no warning signs, no patterns and no typicality, therefore it is totally unforeseeable. it never happens like it did before, and anyone who says they know different is lying, to you or to themselves. If later it turns out they were right, they got lucky.

Secondly, those guys in suits are paid to raise the alarm. No one wants to watch a guy who tells us 'the markets are strong, stocks are rising, your money is safe' (or absorbs the advertising bookending his statements). That makes for lousy TV. Worry is what gets viewers to pay attention. Have you seen the local evening news in the last 20 years? It's all shootings and car wrecks and fires and kidnappings. Any statistician will tell you our society hasn't gotten more violent or more unsafe over the years. But the news sure has. And financial news is no different.

Third, it doesn't matter anyway because the stock market always rises more than it falls. Even if you fall prey to the fear and even if your whole portfolio takes a big hit-- 50% has in fact happened-- if you ride it out you will be fine.

"The stock market is a device for transferring money from the impatient to the patient." --Warren Buffett

I cannot emphasize this enough: doing nothing in the face of widespread market panic is the hardest thing in investing. It is far more difficult than successfully picking growth companies, more difficult than the discipline to keep socking away the money to buy with. Sitting on your hands-- or tougher still, buying-- is flat out viciously and miserably hard.

It is also the key-- in fact, it is critical to long-term wealth. You cannot get there from here unless you refuse to sell when things turn ugly. Have confidence in your companies, have patience in the market.