Best of January 2017

Right Price Investing, where the newsletter changes more often than a Jill Stein supporter gets measles
Approchable
I spent the last few weeks sending questions to a few subscribers about the newsletter and came away with a similar answer each time: It needs to be more approachable.  If you get a 3-page long stock treatise with several words only used by CPAs, you’ll stop reading the newsletter each week.
So, in my never-ending quest to test new formats, I am going to try to make the newsletter shorter and more approachable each week.  I’ll offer several small, fun things and keep the longer stuff on the website for those who want it.
I will, however, continue sending one longer email a month with the portfolio reviews, so you’ve got that going for you, which is nice.
The Tyranny of “I feel like”
Earlier this year I had to stop listening to one of my favorite football podcasts.  The podcast had great and interesting content each week, there was a ton of Packers info and the guys in it all had great backgrounds.  I just could not get over the host couching every statement he made with the phrase, “I feel like,” and now that I have this newsletter and these smaller sections to rant about it with that fun title I will.
When you use “I feel like” or “I think” or “In my mind,” you are stealing all of the power out of your statement and giving the person you’re talking to the opportunity to doubt.
If you say “I feel like Aaron Rodgers is the best quarterback of his generation,” you’re just dropping one more medium temperature hot take no one gives a sh*t about.
If you say “Aaron Rodgers’ insane arm talent and td:int ratio make him the best quarterback of his generation,” you immediately sound like more of an expert and the persuasive power of your statement increases exponentially.
Adult up and be assertive when speaking and you will be taken more seriously.
Fiverr Gigs

In the spirit of income generation, I created a couple of Fiverr gigs a while back and when no one ever purchased either, I gave up on them ever being used.

Now that I’m juicing up the website and my subscriber count is increasing about 10% weekly (note, 10% of 20 is 2), I’ve decided to get back on the Fiverr bandwagon and try to make some of that nice freelance cash.

Read more on how you can get me to work for you here.  

2017 Goals
I have always turned my nose up at New Year’s resolutions.  It’s the extreme anti-cliche contrarian in me that won’t stay in the background.  Despite this, I still want to set some goals for 2017.  All of these will be related to the website, so feel free to hold me to them when you see me in public or offer help if you have experience or expertise:
  • Publish at least 3 new eBooks
  • Create and publish my first course
  • Create a podcast
  • Publish audio versions of all my books
  • Hit 1,000 subscribers on this list
These definitely are not easy jobs to do – but they all need to be done if this is going to be a serious business.
Investing in Asia​​​​​​​
I am constantly searching for feasible ways to add more geographical diversification to the portfolios I manage.  Typically, I will add a foreign market debt ETF or buy the ETFs of some countries with low valuations.
Those are both sort of half-measures, so I was delighted to learn that Kim Iskyan, a former hedge fund manager and world traveler, was starting a new newsletter focused on investing in Asia.
I was lucky enough to read through some of his material, talk with him on the phone last week and add this newsletter as an affiliate product for the website.  I look forward to reading it each month and recommending it.
To learn more about his method, read their affiliate post on the site here and if you want to go straight to the pitch for the newsletter, simply click on the subhead above (it’s only $59/year!).

Until Friday
A few times a week, I drive home for lunch to take the dog out and listen to a podcast. Midway through December, I found myself ignoring the podcast to instead think over a bunch of stock ideas and strategies that had been floating around in my mind.
On the way to work one of those days, I mentioned in passing to my fiancée/editor that it would be fun to write an eBook with all these strategies and write-up the stocks.  I could use my checklist to write-up some of the stocks (to encourage readers to sign-up to my list to access the checklist) and put my Fiverr tear-sheet in front of some of the chapters as well.
“Well, do it then,” she responded.
Over the next two-and-a-half weeks or so, I neglected animal time after work, spent the weekends putting together stock charts and spreadsheets, contacted a couple different graphic designers to work on the cover and kept in mind all the grammatical issues I tend to make in everything I write.
Soon enough, I had plowed through 65 pages and the book was ready for her to edit.  The final product has ten trades: two ETFs and nine stocks (one trade buys one stock and shorts another).  The strategies/themes/whatever buzzword you want to use are:
  • Boring Fixed Income
  • Trump Trades
  • Market Overreactions
  • Buying Back into Active Investing
  • Gold and Silver Bets that Are Not Just Gold and Silver Bets
All-in-all this is my favorite book I’ve ever written.  As I have with my newsletter, I targeted approachability and humor in the writing and tried to use as many different tools to analyze the stocks as I could to get beginner level exposure to all of them.
Hopefully, you’ll love the book as much as I do.  It is free right now and will be until this Friday – I’ll send another email out then as a reminder.

Portfolio Review Week! Mount up!

By the end of 2016, uranium was down about 90% since 2010.

Ignorance of the science behind nuclear energy, the Fukushima disaster and assorted other nonsense had pushed the price far below levels where it could realistically be produced.

For a few years, commodity investing expert Rick Rule had pounded the drum to speculators to invest in Uranium. His thesis that the basic laws of economics would not allow the price of a valuable commodity (nuclear energy still creates tons of demand for uranium around the world) to stay below the cost of production was logically sound but was taking a while to work out.

We added uranium producer Cameco to the Market Timing Portfolio when it debuted in November 2016.

On December 21, our favorite Quant, Meb Faber, wrote about uranium comparing it to coal stocks at the end of 2015.  Coal stocks en masse doubled in 2016.

The timing couldn’t have been better, Cameco is up 24% since Faber’s post and up more than 40% since it was added to the market timing portfolio.

The market timing portfolio as a whole has massacred the market, and good thing too, because the other portfolios have seen performances ranging from satisfactory to FUBAR.

In addition to Cameco’s massive return, our trades in the Russian, Polish and Brazilian ETFs are all up more than 15%.

Nice.

For more on the portfolios (including the performance of the Stocks for 2017 portfolio’s first month and some lessons I learned from losing 70+% in option trading),you can find this month’s review here.

Quora Answers

How to invest $50,000 for 3-5 years

Make a watch list of quality companies you are familiar with and interact with in your daily life.

Either learn how to value them or use a service like Morningstar to value them.

Sell put options on the companies at a strike price below that value. When you sell the puts you are paid a premium up front to give the other party the right, but not the obligation, to sell the stock to you at the strike price.

For example, if you sell a put with a strike price of $115 and an expiration date a month out on Apple for $2, you receive $200 up front (option contracts have to be 100 shares). If the stock price falls below $113 (the strike price minus the premium) the other party is likely to put the stock to you, which means you would have to pay $11,500 ($115*100) for the stock.

This is a lot of money (you would probably want to focus on stocks with lower prices for a $50k portfolio), but remember that you believe the stock is worth more.

When you are put stocks, hold them until they trade for 20% more than the value you calculated.

Once they approach that number, sell call options.

When selling call options you are also paid a premium up front to give the other party the right, but not the obligation, to buy the stock from you at the strike price.

In both of these cases you will find quality companies and pick a price range where you want to own them. You can then sell other people the option to buy or sell them outside of your price range to trade around the position.

As you do this over and over you will get a handle on option pricing and be able to target when the volatility portion of the option price is too high or too low. You can also start identifying other ways to trade with options. If you’re interest I wrote about my option trading strategy here: Toward an Active Trading Strategy

When should you buy a stock?

I’ve been a value investor for about 13 years and in that time have never figured out quite how to perfectly time my buys. No one has really.

There are technical indicators, and I have written about trying them out before, that seem to allow you to better gauge the market’s emotions.

Many value investors think reading charts is hogwash but trust their own ability to judge management from thousands of miles away or predict cash flows 15 years from now.

I think of these things there is a better chance that buying when a stock is trending up (or even when a down trending or channeling stock is starting to move toward a better trend using Bollinger band width and MACD to figure this out) so that you know the emotion of the market is positive will have consistently good results.

What is your investment checklist before you buy a stock? 

I have a detailed seven-page checklist I go through for all traditional value investments (think Peter Lynch/Warren Buffett style stuff) I make. It works pretty well for these straightforward deals and I’m thinking of adding some technical analysis to it as well.

The problems I’ve had with the checklist are that I have a hard time applying it to industries that have unusual characteristics, commodities, turnaround situations, ETFs and CEFs, high growth companies, short-term trades, you get the picture.

When it comes down to it, the checklist applies to the minority of potential investments/speculations that I look at. I put all this time into synthesizing my thoughts and reading all these books and I don’t really use it that much. Oh well.

Should I start a McDonald’s franchise if I had $1mm?

Do what McDonald’s would do.

Identify some good commercial real estate and buy it with 25% down or as little as you can put down so you can spread the cash over several properties.

Find people who want to start reliable franchises in the locations and lease the CRE to them.

This way they are paying the debt down for you.

Set aside part of the payment for maintenance issues and make sure to use the depreciation and interest to reduce your taxes.

Over time collect the excess payments and invest them in municipal bonds yielding 4%+ tax free, when you have enough for another down payment buy another property.

What is the Value Investing approach for bonds?

Meb Faber recently wrote about this in one of his classic white papers that turns into a fun ETF: http://mebfaber.com/wp-content/u…

Basically, when you’re looking for value you look for the highest yields. This is similar in other forms of value investing – in stocks you look for the highest earnings yield and with real estate you look for the highest capitalization rate.

As for how to fundamentally analyze bonds, which is what value investors do, you should first analyze the balance sheet.

Look for ratios of debt to cash and other assets that can be turned into cash. In the footnotes for the financials you can find the maturity dates of the various debt instruments the company has used. Make sure that there isn’t a clump of them due prior to your bond maturing.

Next, analyze the income. As a credit underwriter in my day job, our main focus is cash available for debt service. Compare this number with the annual required interest and debt payments and make sure you have a sufficient margin of safety if the income happens to fall.

Finally, it is important to keep in mind that bonds almost always have a binary outcome – they will default or you will get paid back. In some circumstances there can be restructuring as well, but for our analysis that can be considered the same as a default.

If you get paid back 100% on the maturity date all volatility in the interim is irrelevant.

How do I convince my parents to let me open an investment account? 

I opened my first brokerage account when I was 13 with $1,000 and immediately put half in Krispy Kreme and half in Pfizer. Both were terrible decisions that lost 30+%.

As I got different summer and after school jobs I would transfer more money into the account and diversified more and created better returns.

My parents were also wary at first. I was able to convince them that it was a smart decision by earning the money on my own through these various jobs and writing up every investment I made to prove I was thinking them through well.

I started a blog when I was around 15 to track my investments and write about what I was learning. If you can’t convince your parents right away this would be a good idea. You can point toward the good picks you have made and show them what you have learned and even get feedback from professional investors. I often used my age as a way to get a foot into the door to discussions with hedge fund managers who otherwise would have ignored me.

Worst case you can invest the money when you turn 18 either way.

Another strategy could be to agree to save half of what you contribute to the brokerage account in a traditional savings account/CD/municipal bond that is super low risk.

If you are committed to earning money and saving it from a young age you can demonstrate discipline that is unusual for someone your age and that can also be an argument for investing.

Good luck!

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IPOing and Income Growing

Last week Snap (the parent company of Snapchat) filed to go public in March.
As per usual with technology stocks, Snap will likely be tremendously overvalued when it begins trading.  The company has been rumored to be seeking a $25B valuation at its IPO – over 60x its sales of $400mm.
Facebook IPOed at about 13x sales and Twitter IPOed at about 4x sales.
Facebook and Twitter IPOed long ago by tech industry standards, so how does the Snap valuation compare to the current Facebook and Twitter valuations?  Facebook currently trades for $209/user, Twitter trades for $34/user and Snap’s IPO will price it at $158/user.
Facebook has revolutionized the online advertising industry and is one of the better managed companies in the country.  Snapchat is much closer to Twitter as far as where it sits in its corporate life-cycle.
In addition to the valuation madness, the company will debut with a complicated share structure that gives its CEO total control over all aspects of the company with little to no checks and balances.
This structure can work well with a visionary CEO, but there is not enough evidence to date that Evan Spiegel is that to justify pricing the stock this high with this structure.
So where are investors to turn?
Traditionally, investors seeking safe haven in stocks turn to dividends.  The dividend produces a floor for a potential drop in the stock prices and companies focusing on paying and growing a dividend are usually mature and not focused on risky growth initiatives.
Unfortunately, the mass investment in dividend and low volatility stocks with passive investing strategies has driven their prices up to unsustainable levels.
Luckily, I have swooped in with a new article on alternatives to dividend stocks.
Let me know what you think.

 

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Alternatives to Dividend Stocks

Dividend stocks are traditionally the go-to conservative stock investment.  Anyone who can’t sleep at night because they are too worried about their Fitbit investment or latest coal speculation can turn to a stodgy old slow-grower with a 4% dividend and sleep peacefully until the cat starts clawing through the door to be fed at 4 am (note: this may not happen to everyone).

There are all kinds of studies on the efficacy of dividend stocks and their low volatility.  So many in fact that trillions of dollars have poured into ETFs focusing just on dividend stocks, driving up the valuations of the classics to unappealing levels.

There are so many hoops to jump through to make dividend investing worth it, you may as well give up.  Meb Faber summarizes it well here.

There is still a need for low volatility, income producing investments, however.  Thankfully, for all of society, I have a few suggestions before the entire financial system comes crumbling down.

Use Fixed-Income

Let’s start with the easiest one – easiest for me at least, since I’ve written about this a ton before.  Well, at least twice, once in an article and once in a book .

Shareholder Yield

Another easy one.  This time we’ll return to the Meb Faber well.

Faber has an eBook on the subject, a domestic ETF (SYLD) and a Foreign ETF (FYLD).

Shareholder yield is the sum of: dividends paid, stock repurchased and debt repaid over the market cap.

The theory is that dividends are not the only way to return value to shareholders.  When you pay a dividend, you are sending the company’s assets to shareholders.  When you buy back stock or pay down debt, you’re increasing the shareholder’s claims on those same assets – without having to pay a tax on it.

Faber’s funds both sort their investment universes and purchase the top 100 stocks by shareholder yield.

Get an Investment Property

My fiancée and I have our first condo on the market right now.  If all goes well, it would add a substantial income each month.

Right now, the condo is listed for $1,200/mo and has been for about, I will soon be dropping that to $1,100.  Let’s assume it eventually rents for $1,100.

The mortgage each month is $515.  Part of that mortgage payment goes to pay off the principal balance (about $88k) and part goes to interest we will be able to write-off. The HOA is $150.

Of that $1,100, about $435 comes straight to us cleanly and about $300 or so comes will come back when we get a tax refund.  If we wanted, we could pay between $100 and $200 to a property management firm to manage the place for us.

Not bad for a condo I purchased as a bachelor with $5k down and lived in for two years.

Buy Some Mortgages

An investment start-up called PeerStreet is giving investors unprecedented access into the market for investing in mortgages.

The company partners with lenders to offer mortgages in which customers can invest.  The loans typically produce returns between 6-12% annually, have 6-24 month terms and have loan-to-value under 75%.

The company also produces all necessary information to underwrite the deals: credit scores, appraisals, etc.

Create an Online Investment Property

Online investment property is the fun term I like to use for niche sites.

Niches sites are education web sites built for a single purpose that either drive visitors to an affiliate product, a product created by the website creator or simply host ads.

Niche sites are typically built of search terms that are popular but not too popular, one podcasters I like often talks about how his aging mother created a second income with a game room website.

Typically, the site is full of good free content (it must be for good search engine optimization).  This could either be done by you or by writers hired on Fiverr or Upwork.

Ads can be from Google’s Adsense and for affiliate products seek out relevant industry products and just look through their sites for an affiliate program.

For more on this strategy from people who have done it well visit the Niche Site Duel.

Use Options

Here’s the one I prefer the most.  It’s simple and you can even use the same type of low volatility classic value stocks.

First, find the stock you want to use.  One I often use is Fiat.  Fiat has a low enough stock price ($10.75) that it would buying 100 shares would be doable for most investors and is worth substantially more than that price per the Morningstar value.

Our trade has a few layers, we start with selling naked puts.

Let’s look at some of the puts available a month out:

We like to look for options with a strike below the current price, so in this instance we would target the $10 strike.  The current price is $0.27.

Assuming the trade went through at $0.27, we would be selling the right for the buyer to put (sell) 100 shares of the stock to us at any time between now and 3/17/17 for $10 per share.  For that privilege, the buyer pays us $27.

To break-even on a sell the stock would have to fall from the current $10.75 to $9.73 which is a 9.5% drop in just over a month.  If it does not do that, we pocket the $27.  If you have a margin account, you would have to hold 20% of the underlying stock value ($1,000) plus the option value ($27) which is $205, the $27 is a 13% return on that margin requirement.  If you don’t have a margin account you would have to hold the $1,000 in cash and would earn 2.7%, which is >35% annually.

It is worth noting, the option price is often outdated, if you look at the bid/ask you would more likely be able to sell the option for around $0.17 or $0.18, this would be an 8% or 1.7% return.

The risk is the potential for Fiat to hit a speed bump and drop to $8 or $7 per share.  At that point you’d be opening a positon with a 20 or 30% loss.  AT that point you’d need a 25% or 43%, respectively, gain to break even.

Let’s say the stock did fall to $9 per share and was put to you.  You now own $900 of stock with a cost basis of $973 (including the $1,000 for the stock and the $27 option premium).  You can either hold the stock long-term, or start trading around the position with covered calls.

If you want to just exit the position where you started, target the $10 strikes.  Right now, similarly priced calls trade for about $0.15.  For offering to sell at $10 for a month you would make 1.7% – 22% annually.

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Portfolio Review January 2017

By the end of 2016, uranium was down about 90% since 2010.

Ignorance of the science behind nuclear energy, the Fukushima disaster and assorted other nonsense had pushed the price far below levels where it could realistically be produced.

For a few years, commodity investing expert Rick Rule pounded the drum to speculators to invest in Uranium. His thesis that the basic laws of economics would not allow the price of a valuable commodity (nuclear energy still creates tons of demand for uranium around the world) to stay below the cost of production was logically sound but was taking a while to work out.

We added uranium producer Cameco to the Market Timing Portfolio when it debuted in November 2016.

On December 21, our favorite Quant, Meb Faber, wrote about uranium comparing it to coal stocks at the end of 2015.  Coal stocks en masse doubled in 2016.

The timing couldn’t have been better, Cameco is up 24% since Faber’s post and up more than 40% since it was added to the market timing portfolio.

The market timing portfolio as a whole has massacred the market, and good thing too, because the other portfolios have seen performances ranging from satisfactory to FUBAR.  In addition to Cameco’s massive return, our trades in the Russian, Polish and Brazilian ETFs are all up more than 15%.

Nice.

As for the other portfolios here’s the summary:

$7.99 ‘ template=’ProductLink’ store=’valueinvesand-20′ marketplace=’US’ link_id=’72382a35-e6ae-11e6-ab4a-c91505899412′] starts off strong… almost

The portfolio had four 5% gainers and two 10% gainers in its first month.  The S&P returned 2.4% in the month, so this should’ve spelled market beating returns for the new portfolio.  Unfortunately, Tesla has spiked 20% in the month and our short position in it has dragged the portfolio down.

Let’s look at why I think Tesla will soon return to saner levels.

You may recognize several of these indicators from the Fitbit chapter of the book.  In the book I used them to show how oversold Fitbit was and why reverting to the mean would push it higher.

Tesla’s chart shows the opposite.

Both the RSI and Stochastics show it as hugely overbought and the Bollinger Bands show that is hugging the upper band.  This price jump increased prices to levels not supported by the past price history.  I actually stopped out of a Tesla short in my personal portfolio due to it.

I believe the key to identifying when the stock will drop back to normal levels lies in the MACD.  When the MACD line crosses below the signal line I will look to reestablish my short.

Learning a lesson about option stop losses

I noticed earlier this week that I hadn’t updated my personal portfolio on the portfolio page in a while.

It’s on there now if you want to check it out.  Without a doubt you will notice a few 70+% losses it sustained in some gold miner trades.

Not the best look.

I did learn some good stuff to add to my option trading strategy, however, so let’s go over that.  If you hadn’t read it before, here’s the strategy.

In September last year, I purchased a basket of gold miner calls that expired in 6+ months.  The buy decision worked perfectly with my trading strategy and I had a fundamental and technical basis for each trade.

Unfortunately, Donald Trump getting elected killed the price of precious metals – driving the prices of all my calls well below the trailing stop.

“No biggie,” I thought, “I can ignore the stop here because the expiration is so far off it’s bound to get back to break-even at least.”

So I held the stock and each morning checked the portfolio just to see worse and worse results.

Here’s the issue: the price of the options collapsed so far that the daily drop in price for getting closer to the expiration (this is called time decay) often exceeded any potential increase in the price for the stocks going up.  Additionally, getting back to break-even is far harder than it sounds.  For example a 20% drop requires a 25% gain to the new lower prices to break-even.

50% requires a 100% gain and 70%, to which a couple of these options fell, requires a 233% gain.  Not good.

Going forward, I will respect the stop loss even if the expiration is pretty far off.

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Best of Newsletter December 2016

Each week I send out a free email newsletter, you can subscribe over to the right or at the end of the post. 

How to Hack Wall St. On Sale

As promised, I have set up a sale for my first book, How to Hack Wall St.  The sale will start on Tuesday, December 6.  The book will cost just 99 cents.  On December 9, the price will jump up to $1.99 and then on December 13 it will return to the current price of $2.99.  I will send a reminder email on Tuesday when the sale starts.
For more on the content of the book, jump to the break below.  Before the break I will tell the story of how the book came about.
At some point in 2014, I read a Quora answer from James Altucher on the best way to start an online business.  His answer was with eBooks.
Experts – and everyone is somewhat of an expert on something – can write a series of eBooks on a topic, start a website on that topic, use the eBook to create a mailing list and then use the mailing list to drive sales of future eBooks, affiliate products, etc.
This piqued my interest.  I had written tons of blog posts in the past and at the time was in search of a friend to send investing and economic rants to.  Why not combine these two interests?
So I used maybe 20 pages of special situations articles I had written in the past, added some case studies and some more special situations, created a portfolio and published the book.
Not a whole lot happened.
I shared the book on Facebook and LinkedIn – though I was too afraid to tell more than two or three people at work about it.
Over time I have sold maybe 40 copies of the book.  I did a paperback version and signed copies for some of my parents’ and Grandpa’s friends.
One day I went to look at the book Amazon page and two terrible reviews had appeared.  Both complaining about the lack of drilling down I did into the strategies – despite the fact that the description shows a $3 book of 40 pages. Oh well.
Going forward I will continue to manage and update the portfolio that was established in the book.  The book is still relevant and I still subscribe to the strategies in it, but I still plan to write a second version cutting out some chapters and adding more content.  So, if you end up purchasing a copy, please consider leaving a review.  Need to get that average over 1.5 :-/
Filling out the Special Situations Portfolio
In honor of this amazing sale, I decided to use some of the cash hoard that has built up in the portfolio and found three ultra exciting muni-bond closed-end funds trading at a discount.  Nice.  You can find the article about them here.
Confessions of a Teenage Investor Sample
As some subscribers know, I have been working on my next book, Confessions of a Teenage Investor, for the past several weeks.  You can find its introduction here.

The book is a traipse through old blog and message board posts I made in my teenage years as I was learning investing.  I have gone through and copy edited the posts and added footnotes in order to make fun of myself, update returns of specific stocks and highlight lessons to be learned from each of the articles.
Below is a sample post I wrote in December 2005 on American Eagle, which was my favorite clothes brand at the time.
As you’ll see, my analysis often had good intentions and a good foundation – but in the end it was almost always totally off base, simply because I was chronically too optimistic about brands that I used and loved.

WEDNESDAY, DECEMBER 21, 2005

American Eagle, like Warren Buffet

I recently finished reading How to Pick Stocks Like Warren Buffett: Profiting from the Bargain Hunting Strategies of the World’s Greatest Value Investor.

The third part of the book is about analyzing companies like Buffet, here I will analyze a company that currently interests me: American Eagle.[1]

Valuation

The first chapter is about valuation, mainly Discounted Cash Flows. I’ll use 12% as my first five years growth, 8% for the next five years, and 3.5% terminal growth. $366 million will be my cash flow number.[2]

 

> Five Years 8%

Terminal 3.5%


Discount Rate 11%
Year Cash Flow Discount Cash

1 $409.92 1.11 $369.30
2 $459.11 1.23 $372.62
3 $514.20 1.37 $375.98

4 $575.91 1.52 $379.37
5 $645.02 1.69 $382.79
6 $696.62 1.87 $372.44
7 $752.35 2.08 $362.37
8 $812.54 2.30 $352.58
9 $877.54 2.56 $343.05
10 $947.74 2.84 $333.78
First Ten Years $3,644.29


Add Terminal Value $4,606.16

Intrinsic Value (Per Share) $54

This model gives a value of $54; more than twice the current value. But the DCF is not all powerful, and sometimes ignoring is better than relying.

Book Value

Mr. Vick says book value is Buffet’s favorite yardstick for growth. Here’s American Eagles ten-year book value growth numbers:

 
Year Book Value Growth Earnings Growth
1996$71.10–
1997$90.8027.71%230.51%
1998$151.2066.52%177.44%
1999$264.5074.93%67.65%
2000$367.7039.02%3.42%
2001$502.1036.55%12.47%
2002$577.5015.02%-15.92%
2003$643.7011.46%-32.36%
2004$963.5049.68%255.50%
2005$1,136.3017.93%27.47%
Average37.65%80.69%[3]

American Eagle’s book value growth is extraordinary. The growth was consistent, as compared to earnings growth which was powered by four main years. However there are bad ways a company can grow book value, I will examine those now.

Issuing Shares

Companies can easily grow book value by issuing more shares. While this grows cash, it also dilutes the value of shares. American Eagle has 15% share growth during the past ten years, compared to book value which has grown a total of 1,498%; share dilution is not a problem.

Acquiring other Companies

I also don’t believe AEOS has been acquiring other companies to fuel growth.

Letting Profits Sit Gathering Interest

American Eagle has been sufficiently investing cash back into the business. Quicken estimates American Eagle has created $4.98 in market value for every dollar of retained earnings over the past five years.

Return on Capital

Return on capital shows the life-blood of a business. I will use Net Income / (Average Equity) + LT Debt. I will use a method described in the book to see what earnings growth is needed to sustain its current ROE.

American Eagle’s current ROE is 20%.

Assuming Equity will grow about 21% a year American Eagle must grow earnings 14% a year to sustain a 21% ROC. The industry’s current ROC is 15%, American Eagle is above this, but it could do better, and may have a hard time in the future maintaining a good ROC.

Hurdle Rate

The book says Buffet looks for a ten-year hurdle rate of 15% CAGR before investing. I’ll go a little further and look for 20% CAGR over 5 years.[4]

Over the last ten years American Eagle has had an average P/E of 19.6x, I will use this to project the future price for my hurdle rate calculations. I’ll also assume a twelve percent earnings growth rate, and a 15% dividend payout.


Expected 2010 price $ 54.59
>> Dividend $ 1.69
Total Dollar Amount $ 56.28
Expected 5y Return 168%
CAGR 21.79%

American Eagle passes the hurdle rate test, if it can grow earnings at a twelve percent rate for the next five years, and then trades at a P/E of ~19.6 the compound annual return should be about 22% per year – not too shabby.[5]

Putting Growth in Context

Even Buffet admits estimating growth for a company, outside short periods, is not exactly a walk in the park.[6]

Vick suggests using Quicken’s stock evaluator to judge the earnings growth necessary to justify the current stock price – inversing the DCF.

Using a 15% discount rate the stock evaluator says American Eagle must grow its earnings only 2.3% to justify its current stock price.[7]

Comparing Stocks to Bonds

Buffet won’t buy stocks unless its earnings yield (e/p) is greater than an average bond yield.

Using Morningstar’s yield comparison I see American Eagle’s earnings yield is almost double that of a 30-year T-Bill.

[1] I had an embarrassingly strong reliance on American Eagle clothes in High School.  The clothes I wear today is slightly better and almost always has a Packers logo on it.

[2] We’ll have to make-do with the numbers from the past ten years because that’s all Morningstar has.  The average growth for the first five years was -10% on 1% average revenue growth.  The second five-year period boasted stronger revenue growth at 2.5%; this did wonders for a scorching cash flow growth number of 10%.  The ten-year average was -18%.  Whoops.

[3] This growth collapsed harder than a ____, for the past ten years, book value growth averaged -3% per year.  This was due to excruciatingly bad performance.

[4] So far the main lesson to be learned from this analysis is to require 20% annual returns from teen-based retailers.

[5] American Eagle failed both goals massively.  As before shown income crashed like an asteroid that Bruce Willis was on and the current PE, at 13.5x, is almost 50% lower than expected.

[6][6] Talk about a prophetic statement following a batshit crazy one.

[7] As I have made clear, it couldn’t even achieve that easy goal.

Trade Like Warren Buffett Notes
For whatever reason self-help guru James Altucher has disavowed his older trading/investing books, including one of my favorite Buffett books: Trade Like Warren Buffett.

In a sea of bland-same-old-conservative-value-Buffett-books, Altucher’s evaluates the out of the ordinary strategies Buffett pursued and ends the book with interviews of two of my favorites hedge fund managers: Mohnish Pabrai and Zeke Ashton.

I have devoured this book at least seven separate times and much of it led to the techniques I wrote about in my first book.

The strategies that Altucher describes include: Merger Arbitrage, Relative Value arbitrage, Junk Bonds, Closed-end fund arbitrage, PE ratios and market timing and disasters.

Portfolio Review
As I repeat endlessly in these emails and tell myself during lazy Sunday nights when I would prefer to lie down and watch football, the creation and consistent following of several portfolios is the backbone of this site. Followed closely by run-on sentences.
My goal is to establish strategies that combine passive and active elements, and I have several along that fit that description. The most passive is the asset allocation portfolio, which gets re-balanced once per year (and we’re doing that today!) The most active is my personal portfolio, in which I have several long-term names and several trades (and we have a new trade today, what a deal!).
To find all the portfolios, visit the portfolio page on the website.
Note: we will not update the Hack Wall St. Portfolio today – we just went over it last week and I’m sure the twelve people who read that have had enough Wall St. Hacking for the month.  If you’re really into Wall St. Hacking, here’s the article that I wrote last week.
Asset Allocation
We’ll start with the fun one.  Our asset allocation portfolio is an attempt to diversify away asset class and geographic risk, while also earning a consistently strong return over time.
The strategy includes an annual re-balancing – taking money out of potentially overpriced asset classes and putting it into undervalued ones.
Here is the what we had to do (the portfolio had an original fake value of $100,000):
Junk Bonds -$79.76
Emerging Mkt Bonds $148.81
Gold & Silver $1,541.30
Commodities $15.37
Oil Stocks -$304.55
REITs $466.34
Int REITS $742.58
Dividend Stocks -$274.12
Global Momentum -$84.19
Shareholder Yield -$1,367.60
Global Value -$664.65
CASH -$139.55
Positions with positive values had more shares purchased, which were funded by the sales of positions with negative numbers.
The Shareholder Yield and Global Value ETFs, which both had positive gains (Shareholder Yield was up 11%), are doing the most work in the portfolio. They make-up for the piss poor performance in Gold & Silver and the REITs.
Market Timing
We debuted the Market Timing portfolio in the last exciting portfolio review letterand it has since taken off like a rocket.  I should quit my job and start timing the market tbh.
An 18% gain in our Uranium minor, Cameco, and a 12.4% gain in the Russia stock market ETF has pushed the portfolio return to 3.5% – blazing past the S&P 500 return of just 3%.
Investors were pleased with Cameco’s third quarter results and I can only assume formerly scared investors charged into Russian stocks following the incessant articles about its government influencing the US election. If you can hack the DNC’s emails, why can’t you run a profitable oil company?
My Portfolio
There’s only one new trade this month (new readers can find my trading strategy here).  I’ve made hay in the past buying oversold story stocks and this trade should follow that same path.
Fitbit has fallen 70% this year and even more from its 2015 IPO price.  My fiancee and I have each loved tracking our steps and hated tracking our calories with the app and have become somewhat addicted to the weekly step challenges with friends and family.  I seem to diverge from the typical market thinking in believing that the company is building a strong network effect in its challenges, calorie tracking and scale integration.
So when I determined the stock was oversold (I spared you the pain of loading a bunch of stock charts in this email by putting them all in a post on the site) I lunged at the opportunity to build a position.
For the value guys, the stock trades for just 0.8x sales and 14.5x forward earnings, despite 585% revenue growth over the past two years.
I purchased one call with a Jan 2018 date and $5 strike for $3.40.  This is a $340 outlay.  At Fitbit’s current price, the intrinsic value of the call is $2.48.
If Fitbit manages to get to its 50 day moving average of $10.39, the intrinsic value of the call would be $5.39, if you add the same time premium/implied volatility that it has now, you get an option price of $6.31 which is an 86% gain on a 39% move in the stock.  If it gets back to its 200 day moving average, the option gain would be 180%.
I’ll use a 35% trailing stop loss on the position.
Christmas Presents
In a completely transparent attempt to earn some affiliate cash, I have pulled together a bunch of recommendations for Christmas presents to get for people who want to be rich.  And, really, outside of Jill Stein supporters, who doesn’t?  I’ve suggested four books (one for each of the site’s pillars) and two courses.  If you enjoy the site, try to buy the expensive courses; if not, still buy all of the books.  Read more here. 






 

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Best of Newsletter November 2017

Each week I send out a free email newsletter, you can subscribe over to the right or at the end of the post. 
In the last newsletter I talked about my 401(k) Pros and Cons Article.  That one is still one of my faves, so if you haven’t read it make sure to and if you have, go back and read it again, it’s still hilarious and informative.  Anyway, the sequel is How to Invest your 401(k).  This one isn’t as entertaining, but it’s definitely still informative.
A Bunch of Book Lists
Book list is definitely my favorite article type.  I get to revisit fun books and passive aggressively criticize ones I leave off the list.  Plus, as an Amazon affiliate, I get like 4% or something of the book price if people actually buy books off my list.  Free money.
So, while the Packers were breaching yet another level of mediocrity or, really, outright excruciating horribleness today, I sat down and created five books lists. The first has a relatively boring title but they get progressively better after that.
There are also bonuses in a few of the articles (spoiler alert: all of the bonuses are books I wrote or affiliate products).
All in all that’s 29 books to read.  Great head-start on a New Year’s Resolution.
Portfolio Review
For new readers the best page to learn about my goals for my website is the start here page.  I talk about Pat Flynn, who is my role model for the guinea pig design of the site, and the different pillars of my plan to become rich af, and I lay out where to get started for each pillar.
The backbone of the finance pillar is the portfolios I track.  For most investors, professional and individual, active management is more a road to ruin than a road to lifetime success.  Unfortunately, this has led to a mass proliferation in passive investing strategies, driving up the prices on their member stocks to unappealing levels.
The portfolios I track span the spectrum of active vs. passive management, and they also seek to contain catalysts or other factors that preclude them from institutional impact.
This week is portfolio review week for the newsletter.  I will identify some key changes in the make-up and returns for each one and (start getting excited now) create a new one.  You can find the portfolios here.
Let’s start with:
My Personal Portfolio
I don’t vote.  The policy differences, in practice, between the two main US parties are so marginal as to not exist.  George Bush started the TARP program.  Barack Obama never shut down Guantanamo Bay and increased the number of American soldiers milling about in the Middle East.  Donald Trump will be the first pro-gay marriage US president.  Hillary Clinton is, possibly, the most Wall Street friendly politician in Washington.
That said, there were enough differences between the policy promises this year that there are ways to trade around the election of Donald Trump.  Take these suggestions with a dump truck of salt, of course, because the last several presidents have seen a 97% or so (anecdotally) difference between policy promises and results.
  1. Buy coal and sell solar – Even if you ignore the moderately more free-market stances of Trump, his complete denial of climate change makes you think there will be both a reduction of regulations on coal miners and a reduction in subsidies to solar companies (who cannot persist without them).
  2. Buy financials – All the backwards and unsuccessful regulations on financial corporations may be repealed.  It’s also possible that Trump will be snubbed by the Goldman CEO or something and nationalize all banks.
  3. Buy healthcare – If Trump follows through with promises to delete Obamacare and increase competition in the healthcare sector, look for an increase in profits in this sector, as well as multiple expansion as uneasiness about the future of the sector is reduced.

Five paragraphs in, we finally get to my personal portfolio.  On the Wednesday after the election, I put in trades to buy coal, short solar and short Tesla.  The short Tesla trade is the only one that went through, which is ironic because I don’t even highlight it above.  Here are some reasons for the short:

  • Government subsidies account for something like $20k per car sold.
  • The stock is the definition of story stock – retained earnings are negative, there is no free cash flow (even when not accounting for subsidies), everything is based on growth.
  • The growth prospects are not that great.  The company has a history of creating frustrating delays with a focus on the perfection of features that have an immaterial impact on the utility of the car.  Additionally, competitors with decades more experience building and selling cars have started to create electric cars that match or exceed Tesla in quality.
  • The company recently acquired Elon Musk’s failing solar boondoggle in an episode possibly meant only to screw short-sellers.
  • Currently trades for 10x book, 4x sales and 87x operating cash flow.   Gross.
Despite all of this, the short will only be a small percentage of the portfolio and I will enforce a strict stop-loss if it falls 25% – story stocks have a way of going up beyond all logic.
Hack Wall St.
This portfolio is the current remnants of my first book (spoiler alert, it will be going on sale next week).  The theory behind ‘hacking wall street’ is to find special situation strategies that have a catalyst or otherwise function outside of the workings of wall street institutions.
At various check-in points, the portfolio has out-performed the market. Now, not-so-much.  The gold miners plus Silver Wheaton allocation hit about 30% of the portfolio and then was throttled by the election results.
The post-election consensus is that, with Trump as president, interest rates will rise. This has pushed down gold and silver prices.  Here’s how that works:
  1. The value of a currency, like everything else, is determined by its supply and demand.
  2. When the federal reserve increases the rate that it charges member banks, the banks lend less money.
  3. This hits both sides of the coin: there are fewer dollars being used so supply goes down and the interest rate goes up so there is more demand for dollars.  Thus, the value of the dollar increases.
  4. Because gold and silver have a so-called intrinsic value they are used as inflation hedges.  When there is inflation (the value of a currency falls) the gold and silver retains their value and their price goes up.
  5. When the market expects the value of the dollar to increase, the value of assets used to hedge against it falling go down.
Precious metal holders still have a few things working for us.  These steps aren’t always followed like clockwork – many times the interest rate changes aren’t enough to affect how Banks lend.  Additionally, the Fed has threatened to raise interest rates in the last nine or so quarters and done it exactly once.  We’ll hold our shares.
The Asset Allocation Portfolio

The function of the asset allocation portfolio (which was established in my newest book and then pinned down in an article on the site) is to diversify among non-correlated assets.  All assets get into bubbles that at some time or another must pop; by not focusing in one, the volatility and drawdowns in the portfolio are reduced, which in turn increase the likelihood of investors sticking with a strategy over time and not hunkering down into a sub 1% savings account.

Unfortunately for this newsletter, reporting the month-to-month results of the portfolio aren’t all that interesting.  The portfolio was hit by the same gold and silver decline described above and has also seen bad returns in its real estate positions.  This is likely also a function of interest rate fears – if interest rates increase, the cost of purchasing and holding real estate increases and the attractiveness of fixed income assets increases.
The Market Timing Portfolio

Here is where the excitement comes in.  We’re debuting an all-new portfolio this week and you can read about it here.

DIY Financial Advisor

I loved Wes Gray’s book with Tobias Carlyle: Quantitative Value. I have been thinking about becoming a financial advisor and have been fooling around with different asset allocation models.  Imagine my surprise and delight when I found out he had another book (with Jack Vogel and David Foulke) combining the three.

The book is a very easy read (especially when you skip over the all the studies/back testing) and the authors do a great job simplifying complex strategies and creating solutions for investors at various skill and risk levels.






 

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Best of the Newsletter October 2017

Each week I send out a free email newsletter, you can subscribe over to the right or at the end of the post. 

Profiting From Elizabeth Warren Madness

The political world crapped a proverbial brick last week when noted economic ignoramus Elizabeth Warren suggested in congressional hearings that Wells Fargo CEO John Stumpf should lose his job over an aggressive and sometimes fraudulent consumer banking practice. The company fired 5,000 employees, it was fined $185mm and the stock responded to the controversy by dropping 12% in the past month.
Meanwhile, the employees fired represent less than 2% of those employed by the corporation and $185mm is just over 1% of last years operating cash flow of $14B.
Morningstar puts the company’s value at almost 50% higher than the current price, the stock trades for just 1.3x book and the dividend yield is almost 3.5%.  I will be looking to add Wells Fargo in each of the retirement accounts I manage this week.
Follow up the next week
One more thing, I hope you looked into starting some sort of position on Wells Fargo last week.  I purchased call options with a $42.50 strike price that are now up 56% on just a 3% increase in the stock price.  High five.
Overbought or Oversold 

When oversold the sellers of the stock (supply) have temporarily outnumbered buyers (demand). Obviously overbought is the opposite situation. The theory around these two terms is that at times the market will overreact in the short-term to some piece of news or even a rumor, driving the price past where it should go – in either direction. Here are the measures we use to find whether a stock has been overbought or oversold:

Relative Strength Index – RSI oscillates between 0 and 100 based on the speed of price movements. Over 70 is considered overbought and under 30 is considered oversold.

Bollinger Bands – Plots the mean price and two standard deviations below and above it over the period chosen. When the actual price is further than the two standard deviations away from the mean the security is considered overbought or oversold.

Full Stochastics – Shows the latest close relative to the high/low range over the periods chosen. 20 is considered oversold and 80 is considered overbought.

401k Pros and Cons
Anyway, one of my actual independent actions is my complete disregard for 401k plans.  There are too many better options for my money and I’m way too claustrophobic to hold my money in an account that I won’t be able to use for 35 years.

Unfortunately, as I’ve written ad infinitum, ‘How should I invest my 401k?’ is the most common question I am asked as soon as I identify myself as a former financial wunderkind and a current boring bank employee with an investing website.  So I’ve spent a lot of time thinking about the pros and cons of 401k plans, which we will look at in this article.






 

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Affiliate Post: China and the holy trinity of growth stock criteria

 

When it comes to stocks, buying the best – at the right price – is worth it… especially in Asia.

There are a lot of ways to make (and lose) money as an investor. Some strategies are very complex. Others are common sense and simple to understand – but not always easy to implement… like the one I’m about to explain.

As a rule of thumb, if you invest in the best company in a dying industry, you’ll probably lose money. You’re fighting the tide and will probably wind up out at sea. And if you invest in an average company in a growing sector, things could go either way. (Of course, valuations matter here as well.)

But for the biggest gains, look to exploit the holy trinity of investing:

  • Find a sector that is showing exceptional, ongoing growth
  • Identify the leading company in this major growth industry
  • Buy the leading company when it’s cheap

Here are two examples to show how this works.

Apple blossoms

Apple shares (NASDAQ; ticker: AAPL) were trading for US$18 in the spring of 2009. And it just so happens that Apple met all three of the investment trifecta at that time:

1) Top Sector: Smartphone use was on the verge of exploding

2) Leading Company: There was no product like the iPhone, not to mention Apple’s other products

3) Cheap Valuation: Despite its growth rate and outlook, Apple stock carried a price-to-earnings (P/E) multiple nearly the same as the S&P 500 – in other words, it was valued the same as an average stock on the S&P 500, even though it was a leading company in a high-growth sector

If you’d bought Apple shares in the spring of 2009 when it met the three growth criteria, you would have made nearly 400 percent over the next three years (compared to the return of the S&P 500 of about 50 percent). And if you held on to the shares until today, you’d be up over 500 percent.

(Of course, “if only” is not a valid investment strategy (as in, “if only I bought Apple shares when they were just US$18”). We all have perfect hindsight – and if these decisions were always obvious and easy we’d all be rich.)

100 degrees of Baidu

Another example of exploiting these three growth factors is Chinese search engine giant Baidu (NASDAQ; ticker: BIDU). It’s like the Google of China – and the name in Chinese literally means 100 (bai百) degrees (du度).

In early 2013, Baidu was already China’s top search engine and shares were trading for US$90 each.

But even then, Baidu still met the three top growth criteria:

1) Top Sector: Internet search had been growing steadily for years and forecasts called for more of the same

2) Leading Company: Baidu had long before overtaken Google in China, the world’s fastest growing economy at the time

3) Cheap Valuation: Baidu stock’s P/E (price-to-earnings) ratio had pulled back to 20, a small premium to the market, despite its long growth history and positive outlook

Over the next year and a half, Baidu shares moved up nearly 200 percent.

At the time, Apple and Baidu were not undiscovered gems. They were already giant, successful companies.

While it appeared that their success would continue, at the time their stories felt stale to many investors – some of whom no doubt felt the need to discover new emerging companies to earn a big return. But ignoring the well-run market leaders trading at a reasonable valuation was a mistake.

This easy-to-understand strategy – identify a leading sector, find the leading company in the sector, buy when the stock valuations are cheap – isn’t so easy to execute. Is a high-growth sector slowing down? Has the leading company in the sector lost its way with a misguided strategy or management mistakes? Is the apparently attractive valuation accurately pricing in a slowdown in growth?

How to find big growth companies

The good news is, there are a lot of companies that meet these criteria in Asia at the moment.

To help you find them, our friends at Truewealth Publishing are launching a new research service focused on finding these kinds of sectors and companies in Asia. They’ve prepared a report outlining three of the best investment opportunities in Asia right now. What’s more, part of their (very affordable) package includes an exclusive interview with one of the world’s biggest investment legends – who is himself a huge proponent of Asia.

To find out more, and to sign up for this incredible opportunity, please click here.

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My Fiverr Gigs

In the spirit of income generation, I created a couple of Fiverr gigs a while back and when no one ever purchased either gave up on them ever being used.

Now that I juicing up the website and my subscriber count is increasing about 10% weekly (note, 10% of 20 is 2), I’ve decided to get back on the Fiverr bandwagon and try to make some of that nice freelance cash.

I talked a little about Fiverr in my second book and the strategies to making money on the site.  The basics are to create some quick consulting gig, like designing a book cover, editing or transcribing, etc.  and then adding gig extras to up the price.

The two gigs are both stock related and are useful for anyone wanting a quick summary of a stock to reference.  The first is a  one-page report with stats, a stock price chart, financials, business description and key executives.  This is great to collect for each company in your portfolio to keep them in line.

The second is a comparable valuation analysis.  In this I select several multiples and compare the subject’s to comparable companies and project out what the stock price would be if it traded at those multiples.

Both have ultra fun add-ons for me to do even more analysis for even more straight cash.  Nice.

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Fitbit is Oversold

In writing my weekly newsletter this week, I realized that adding in pictures of charts was more work than it was worth and that many people would skip over that party anyway.  So, here is a glimpse into the fun thought process behind my trades that you would typically only get in the newsletter.

Before we start, go read this article to learn about how I trade and what the different things in these charts mean.

This first chart has a cluster of overbought/oversold measures on it.  Fitbit is just 17 cents above the lower Bollinger Band and both the RSI and Stochastics show over sold levels.  It is worth noting that each of these have shown oversold since the stock’s massive drop in November.

This chart shows all the important moving averages.  Fitbit’s price is the black and red line on the bottom, up from that is the 20 day ema, 50 dma and 200 dma.  It’s obviously bad for the trend that the price is below all three.  However, the MACD on the bottom has crossed over the signal line and has diverged from the stock price – both of these are buy signals.  When the MACD crosses over zero and/or the stock price crosses over the 20 day ema look for it to jump.

 

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