I’m enjoying the interview with Timothy Sykes over at Mixergy.com. Love the energy.
Grab it while it’s free there.
Sometimes you look at a stock like Netflix when it was trading at $300+ and think “Here is a great company in a market with super growth, but how can I justify the price?”
Well, it turns out you don’t have to justify the price because the market is beating the shit out of the stock. It’s trading after hours right now at around $86, and who knows where the market will take it.
Hip Egg had the next level of support at around $60, so I would look for the price to gravitate towards that level.
I own a small number of shares bought in the $113-$130 range. I thought that Netflix might blow away earnings due to the price increase (and they did), but the sandbagged forecast they gave is scaring more investors away. I plan on double or tripling my position as the price falls.
Because Netflix is still the best video streaming company by a long shot and the growth prospects there are extraordinary. This company is going to make a ton of money. They may not get the price bonus they got as a WallStreet darling, but pretty soon the earnings will force people back into the stock.
I think the company is on a good path right now. I had my doubts, especially when they announced that Qwikster business. I thought they were panicking and losing site of the strengths of their platform. Hastings, who was probably too aware of customer complaints about seeing titles that were only available on DVD, seemed surprised that users would want to see both streaming and DVD titles in one queue.
It was a welcome site to see them reverse that decision. And Hastings’ explanation that the DVD business “holds value for our 10 million subscribers” is great and shows that they are really thinking about what is best for their customers again.
I think most people by now agree that the price change (really a price alignment) from earlier in the summer was the right move. It makes sense for people who want DVDs to pay for that package separate, and for people who want streaming to pay for that package separate. And I don’t blame the Netflix executive team for not anticipating the backlash that occurred. To me the story was always like this:
You know those streaming movies that you’ve been getting for free with your DVD package for the past year? Well, now you’re streaming more movies than you are getting on DVD. We’ve come up with a price for the streaming service. It’s only $7.99. That’s less than you were paying for your DVD plan before, and hell that’s only $7.99 now too. That’s less than any other competitor, and we still have the best service.
For me, the biggest risk to Netflix’s future profits was in their ability to obtain more material for their streaming service without being shook down. The studios owning video content have a lot of motivation to play hard ball with Netflix on their prices. Conspiracy theorist will see them working together cartel-style to see a company they are more friendly with oust Netflix as the market leader. Maybe Hulu because they own a piece of it… or Amazon or Walmart because those companies sell so many DVDs and BlueRay Discs for them already. But even without illegal price-fixing, it’s easy to see the studios going after Netflix because the money is there, and other sources of money may be drying up.
I’m still worried about the content problems, but I think Netflix has a handle on it. They are throwing money at it, which is good. This will increase their library and their costs, but their other costs are going down. Streaming is cheaper than mail. And user acquisition costs are down as well.
I think there is a new risk to the stock and the business though. And that is the risk that the board will give into public pressure to relieve Reed Hastings. I don’t want to start rumors or drum anything up. But there are a lot of jaded investor folks who are asking for Hastings’ head. I don’t know if the board is behind their man or not. I’d like to research that some more to see where the board stands.
A drastic seat change like that would obviously be yet another blow to the stock price, and I’m not sure the replacement would have the vision Hastings has for the future of streaming at Netflix.
The price will drop tomorrow. It probably will go down further. Management is warning that Q4 revenue and earnings may come in lower. Even more, they are saying that earnings in Q1 will be negative as they spend more money on expansion and licensing deals.
Support is in the $60 range, but who knows if that will hold. Amateur investors will bail more as the stock price falls. Institutional investors will bail more as earnings go into the red.
Netflix will continue to grow subscribers world-wide and will continue to make money. Netflix typically has strong fourth quarters. (Anecdotally, I know a lot of people gift Netflix for the holidays. And a lot of people pick it up to take advantage of new TVs and gadgets.)
If the price really drops to $86 or so. With earnings around $4 a share, that’s a PE of about 22 for a company that is growing at 50% year of year.
Netflix currently has about 24M subscriptions. There is plenty of room to grow. There are at least 96 million cable/etc subscriptions in the US. Imagine 96M Netflix subscribers.
Throw in growth overseas.
Tomorrow, the single largest source of internet traffic in the United States will be run by a company with just a $4B market cap. Netflix owns a huge portion of our mindshare that will only grow larger. As long as they stay smart and continue to perform to their own standards, their business will flourish. Investors will have to return.
With mortgage rates dropping like a brick, it’s becoming a no-brainer for us to refinance our home loan. Even though we just got a 30-year loan 2 years ago at 5.875%, we can get 30-year loans now for around 4.5% or lower. You might be in a similar situation.
The rule of thumb I hear thrown around a lot is that if you can drop 1% off your mortgage rate, you should refinance. To get a more precise idea if refinancing is good for you, you should really take into account how long you expect to stay in your home and see if you break even on your refinance costs before then. A good tool for this is the Mortgage Refinance Breakeven calculator found here (thanks MyMoneyBlog).
I plugged our numbers into the tool:
The tool tells me that I’d break even on this refinance in 18-22 months. We’d save $177* per month on our payments, and so as long as we’ll be here for 2 years we’ll make up the refinance cost and then some. Since we are planning on staying here for at least 2 years, we should refinance.
* The spreadsheet says $147… must have used slightly different numbers.
The only real questions now are (1) should we wait for rates to go lower and (2) what kind of loan should we get.
I’ll avoid (1) for now. I think there is a real chance rates go lower, but I don’t want to be too greedy. I want to take advantage of a good thing while we have the chance. So I’ll assume we can refinance at the current rates.
RE (2): if your home loan situation is anything like mine, you have a lot of options to consider when refinancing. In our case, we have a second mortgage for $30k which is interest only at a rate of prime plus 1% (I think about 4.25% right now). We also have more cash flow than we did 2 years ago and can afford a bigger payment if it means we’ll be paying off the mortgage sooner and saving money on interest rates.
So we have questions like:
Calculating all of this can make your head explode. I created a spreadsheet that calculates just some of the factors, while leaving others out, and focuses on the most promising options for us. You can see it here: Coleman Family Refinance Options.
The main scenarios I focused on are:
The columns of the spreadsheet show:
Note on the columns. Some of them are updated when you tweak the numbers, but the 2, 4, 10, lifetime columns were entered by me after running numbers in that break even calculator linked above.
The second table has the same columns as the first, but shows the difference in payments/debt/etc compared to the status quo. So it can tell us how much we’d save (or spend extra) on payments and how much more (or less) debt we’d have after 2, 4, and 10 years.
There is also a table at the bottom of the spreadsheet showing expected returns if we made monthly investments at a 6% return. This is to help us calculate what we could be making with that extra $147/etc per month if we didn’t use it to pay off M2 or get a 20-year loan.
Before I pull some numbers out and explain how we’re leaning, let me relay a few biases I had going into this.
1. I’m okay with our interest-only second mortgage. At 4.25%, that is a cheap price to borrow money right now. We’re making more than that on our money that we invest in our business and in our retirement accounts. Paying toward the principle on that loan would be like buying a 4.25% bond. Decent return, but not as good as we’re getting elsewhere. So I’m happy to loan at that amount indefinitely basically. However, I do think that rates will go up in the mid-long term. I don’t want to get caught with higher rates that are a strain to pay. Our idea has always been that we would use some kind of windfall (e.g. if we sell one of our website properties) to pay off that loan in one foul swoop. However, we should at least consider somehow locking in a rate for this.
2. I’m against paying PMI in theory. (That’s why we got a second mortgage before instead of one loan with PMI.) If you have the credit, other options are probably better for you. Some good info on PMI here.
The key columns to focus on to compare options is the Annual Payments and the difference in debt in years 2, 4, and 10. The second table shows the difference in these numbers compared to the status quo. And so I can see that if I go with option #2 (refinance just the 1st mortgage), we’d save $1,764 per year and have $5,966 less debt/more equity after 10 years. If we held the loan the whole 30 years, we’d pay $21,985 less.
Now if I rolled M2 into M1 and payed PMI, we would still save $435 per year ($1,500 per year after 3.5 years) and have $12,538 more equity after 10 years since we’d in effect be paying principle on that M2 now. However, we would spend an extra $3725 or so on PMI those first 3 years, and sometimes it can be difficult to get PMI removed once you do have enough equity in the house. Overall though, it seems like using our savings from the refinancing to pay down M2 is a good use of our capital. It lowers our debt risk in the future.
You should be reminded here that not only do we have $5-12k more equity after 10 years, we could have invested the saved payments to have an extra $18-24k in our retirement accounts. Refinancing really is a good deal.
One option I really wanted to calculate was keeping our interest-only M2 and making principle payments to it instead of rolling it into the new mortgage or refinancing on its own. This would avoid PMI or additional refinance options. If we are disciplined, we can pay off M2 just as fast… but we’d also have some flexibility if we needed some monthly cash flow. Scenario #6 lays this out. We would end up paying as much per month/year as we do now. So no savings there, but we’re really okay with our current payments. We would however have an $31,336 less debt across both mortgages.
Scenarios #4, #5, and #7 basically come down to paying a little bit (or quite a bit) extra per month in exchange for less debt in the future and less interest payments over all. One nice thing about these plans is that 10 years out, we could have nearly $50k in equity built up in the loan. Combined with an appreciation in home value (I know, but we’re talking 10 years from now… let’s hope) we could have a nice size chunk to use as a down payment on a larger home.
I’ll let you know what we decide when we go through with things. I think I’m leaning toward refinancing just the first loan and making principle payments on our second mortgage/line of credit. Some things we need to think about:
I hope this helps people in a similar situation as me. And as always, I appreciate any feedback or advice you might have based on this. Cheers!
This is happening to me, with one of my stocks right now: RCRC.
A few months ago, I bought about 50 shares of RC2 Corporation (RCRC), a maker of die-cast and wooden toys, at $20. My wife and I were looking for an investment idea based on the toys and media we’re buying for our 2-year-old son. What I’d really like to do is own Thomas the Tank Engine, but the company owning the license (HIT Entertainment) is privately owned. The best we can do is to buy the companies with contracts on the toys. RC2 makes some of the Thomas brand toys and they just received a contract to make a wooden railway set for the Chuggington brand.
Chuggington is basically Disney’s modern day version of Thomas the Tank. The show is actually pretty good, and more importantly, our son Isaac loves it. We haven’t bought many Chuggington toys however because the trains aren’t compatible with the Thomas track we already bought. Presumably, the Chuggington wooden railway toys will be. This is pretty huge, and I expect RC2 to outperform once those toys start selling this year.
Anyway, there is no real play to be made here anymore because Tomy (TYO:7867), a Japanese company that makes Transformer and Pokemon toys among others, has agreed to by RCRC for $27.90 per share… cash. RCRC has accepted, and upon new of the offer and acceptance, the stock price shot up to $28 per share, where it’s been hovering as the plans get worked out. A nice little gain for us.
So what happens now. This is a little bit different than the case of a merger or acquisition where one company may purchase the other using stock. In that case, your RCRC stock would become Tomy stock at the price of the offer. In this case, our RCRC stock will actually become cash once the deal goes through. We have a few options right now:
(1) We can sell the stock now, before the purchase goes through. If we do, we’ll pay a transaction fee and score a nice win.
(2) We can wait until the purchase goes through, and presumably our investment account with Etrade will be updated to include no RCRC or Tomy stock and instead have a cash balance of $1395 ($27.90×50) added.
(3) We could still buy more stock if we wanted to.
Why would you do #1?
Especially earlier in the week, the stock was swinging a bit, and you could sell to make a bit more than $27.90/share. The transaction fee will wipe out some of this gain but not all. You would also avoid dealing with the potential delays or hassles that could come up when the stock is converted to cash. I’ve never had this happen with Etrade before, but have had delays and odd reporting on my account for a few days in the past when a company I owned was acquired for stock. There is also a chance the deal falls through, in which case the price might fall.
Why would you do #2?
By waiting for the deal to go through, one can basically cash out without paying the transaction fee. If you think the stock price would go higher if the deal fell through, then it might be a good idea to hold on for that chance.
Why would you do #3?
It would be stupid to buy the stock for more than $27.90 if the stock was about to be converted to cash for that amount. However, if you have reason to think the deal might fall through (higher bid, etc) you might be able to get a relatively risk free chance to try that out. If you can buy say 100 shares for $28, you only stand to lose $0.10 per share ($10.00) as long as the deal goes through. If a higher bid comes in you could make much more.
I’m leaning towards 2 right now… though heavily considering just cashing out now. In this case actually, there isn’t much chance for a higher bid because RCRC management already accepted the offer. I’m not sure if they could renig now (although secretly, I’m a little sad there wasn’t some kind of bidding war).
There is a class action suit started by some share holders, who I suppose think the company is selling too cheaply. That lawsuit could hold up the deal or even stop it. At that point, you would have to consider if you think the price will go higher or lower. In the case of the offer Microsoft made Yahoo a couple years ago, I would have expected YHOO to go lower. In this case, I expect RCRC to go higher. There is a risk either way.
Let me know what you think about this particular case… or your experience with similar situations in your own portfolio.
Editor’s Note: The following is a guest post by J. Tyler Matuella.
J. Tyler Matuella is the Publishing Manager at the University of Virginia’s Center for Politics. He also is the author of “Unsustainability in Today’s Sustainable Development” published in Development and Cooperation Magazine, Verge Magazine, and World Review of Science, Technology, and Sustainable Development. He’s majoring in International Business and Accounting at UVa’s McIntire School of Commerce.
Everyone has heard about the famed handful of investors-Michael Burry and John Paulson, amongst others-who saw the real estate bubble forming in the early 2000′s and purchased the lucrative credit default swaps to cash-in when the system collapsed. A couple of those investors made billions in a few months from essentially shorting mortgage-backed securities. Now it seems like there’s a new fad on the Street to discover the next bubble and short it, in hope of making record returns. Many of these hungry investors have turned their beady eyes to the U.S. Treasury market.
Record deficits, the European PIGS, and the Greek debt bailout have put sovereign solvency on the short list of investor concerns since the 2008-2009 financial crisis. Even as the world has seemingly recovered from the dark trenches of the crisis with the resurgence of the equity markets, many investors are still waiting for the real bang.
But they’re not just referring to the Eurozone debt turmoil across the pond. There has been a lot of talk recently about shorting U.S. Treasuries right here at home as sentiment about the unsustainability of the debt has reached a fever pitch.
The concerns are valid. Some people are worried that the U.S. government’s ballooning debt, coupled with a decreasing demand for Treasuries as the equity markets heat back up, will force the U.S. government’s borrowing rate to rise.
On a more pessimistic note, other investment analysts think that gridlock in the nation’s political system will prevent the government from passing tax hikes and spending cuts that are needed for the government to rein in the debt-the eventual implication is a Greek-like debt crisis. As Treasury Secretary Timothy Geithner warned in early January, “Even a short-term or limited default would have catastrophic economic consequences that would last for decades.”
Perhaps the best case scenario (for the United States, at least) for the fall of Treasury prices is that there’s a compelling argument for significant inflation in the near future. Massive amounts of increased government spending, tax cut extensions, and record low interest rates indicate that the economic system is flooded with cheap, pent-up money that will have to be spent at some point. When that happens, inflation will take charge and Treasury yields will have to jump to continue attracting investors. But at least the inflation will eat away the value of the U.S. national debt.
Short positions are already risky. Such is the case with any investment that has a finite upside and an unlimited downside-(although the downside of shorting Treasuries is not unlimited since most investors won’t accept large negative yields). Treasuries take the risk to a different level, however, and I will explain why it’s nearly impossible to earn a huge profit from simply shorting a bond or using a credit default swap on U.S. debt.
If bond prices fall, theoretically the return from shorting a U.S. Treasury could be anything from a few cents, to the entire value of the bond if the government defaults. To those who are convinced that Treasuries will tank because the insolvency threat is real and coming, then it doesn’t sound like a bad investment.
But there’s a key problem with that logic. Even though it may seem obvious, U.S. debt is denoted in dollars. That’s a critical distinction from Greek or Portuguese debt, which is denoted in a supranational currency-the Euro-rather that their own national currency. If investors are looking to earn landslide profits from a steep fall of Treasury prices because of rampant inflation or government default, then that very situation will correspondingly come with a huge decrease in the purchasing power of the U.S. dollar. Since U.S. debt is denoted in dollars, the purchasing power of that windfall profit from the Treasury short could drastically reduce the real return, depending on the severity of the price drop. There won’t be an opportunity to protect the profit by converting it to a foreign currency because the dollar value will simultaneously drop as the winnings are earned.
Some investors have bought credit default swaps on U.S. debt that pays in Euros. However, the exact same problem occurs in that situation as well. Large per-trade profit margins for retail investors are restricted because foreign banks will charge a premium, around the time of the crash in Treasury prices, to insure U.S. debt because they’re not only dealing with the chance of default, but also the foreign exchange risk. CDS are even more risky since they only pay out in the event of an actual default, and it’s very difficult to imagine that the U.S. government would choose to default instead of just running the printing presses more.
The chart below shows the nature of the restriction of real return per bond if an investor does a “simple” short on a 10-yr bond purchased at $100 face-value :
Now that we can see there’s inherently only a small to medium upside to shorting the U.S. Treasuries, the question remains, is that limited potential for gains still worth the risk?
The easy answer is that it depends on investors’ risk tolerance. If you’re a big risk taker or someone with lots of cash like a hedge fund, and if you can afford short term losses and don’t mind earning smaller margins per trade, then go for it. The potential for large absolute gains from making high-volume, small-margin trades still exists on a day-to-day basis without harm to the currency. Investors take advantage of small bond price movements every day. However, as I argued before, any large drop in bond prices will be self-defeating and inherently restricting. The “big bang” of profits that investors found in shorting the real estate market in 2008 simply doesn’t exist in the bond market, in part because of the different nature of the financial instruments used.
To more risk-averse investors, trying to profit by day-trading in the bond market may prove particularly difficult, given the current state of world affairs. If the events in Tunisia and Egypt have taught us anything in the past weeks, it’s that the prices of equities and Treasuries are not governed by purely market forces. Between January 25th and January 30th, investors exited equity positions and fled to the security of U.S. Treasuries amidst fears that turmoil in the Arab world could roil economic growth and pressure oil supplies.
Even with all of the convincing economic evidence for why bond prices should have been falling, bond prices rose for almost a full week while equities fell. Once investors realized their fears had no economic grounding, bond prices fell back and equities returned to normal. If someone shorted bonds that week, they would have lost a lot of money-the problem is that every economic model in the world couldn’t predict what happened in Egypt.
For small-cap retail investors who are certain that bond prices will fall in the coming months, there’s an alternative to take advantage of the fall in bond prices and still earn a huge return without the currency risk. Some inverse U.S. Treasury ETFs, such as the Horizons BetaPro U.S. 30-Year Bond Bear Plus ETF (HTD), allow investors to use leverage to short the U.S. bond market. This ETF is denominated in Canadian dollars, and it hedges against exposure to the U.S. dollar every day. As long as the investor considers the denominated currency’s home country to be “debt-stable,” then this investment avenue effectively reduces the currency risk.
However, there are some salient problems with investing in inverse ETFs-especially levered ones-from a risk-return standpoint. The returns on a daily basis of HTD, for example, range from +200% to -200% because of the leverage. As a result, holding onto these types of funds for more than a few days can be deadly. Treasury prices may fall for four straight days, earning the inverse ETF investors massive returns with leverage, but only one or two days of small to medium-sized losses later can negate multiple days’ gains, even to the point where the net return on investment is negative. While market fundamentals exhibit compelling evidence for why Treasuries should consistently fall, a little political turmoil around the world could cause Treasuries to rise again short-term and severely hamper the returns from inverse ETFs. Since investors really shouldn’t hold onto these levered inverse ETFs for more than a few days at a time because of the compounding high risk of doing so, investors will have to keenly get into them just before the debt crisis in order to earn massive returns-that is, if a U.S. debt crisis occurs at all.
Going short on bonds probably isn’t the best way to take advantage of a debt downgrade or rising inflation in the U.S. vis-à-vis going long on metals. But for investors who insist on taking the risk, the best way that I have heard to do so is to short the bond, take the money gained from the sale of the borrowed bond, and immediately put it in a forex Euro futures contract. That way, the investor locks in the exchange rate and preserves the purchasing power of the initial investment. Even if the dollar greatly depreciates in the meantime, the investor will still walk away with a solid gain. Depending on how far the bond price falls, the investor could still earn 60-70% per trade, though that size return is highly unlikely. In addition, the risk of betting against the world’s reserve currency over the course of an entire yearlong contract makes it an even riskier position, and perhaps more apparent why shorting Treasuries may not be worth the risk.
The dollar still holds strong as the world’s reserve currency, which could prove an obstacle in the future to investors who short bonds amidst political turmoil in the Middle East. And since large profits (per trade) from shorting bonds are very unlikely even in the event of a debt crisis, it doesn’t make sense for most small-cap, retail investors to play the high risk, low return game that characterizes the bond market. However, for those who insist on profiting from shorting the potential debt crisis in the United States, doing a regular short and putting the initial payout in a forex Euro futures contract may be the best way to produce solid returns with minimal currency risk.
A couple months ago I opened a position in Activision Blizzard (ATVI). Blizzard is the Pixar of the gaming industry. All of their games are blockbusters. The most notable title World of Warcraft collects $15/month from their millions and millions of players.
I got interested in the stock after picking up Star Craft 2, another blockbuster game from them. I knew that game was going to sell better than expected. I had been watching pro Star Craft 2 tournaments that were run off the game’s beta for a few months. At that point the game was already getting a ton of attention from gamers.
I wanted to bet on Blizzard. Blizzard was a private company before 2008, but merged with Activision December 2007. So I can buy Blizzard stock now… or really I have to buy the whole company. And although Blizzard is only a part of the company now, Activision is no slouch either with hits like Call of Duty and Guitar Hero. I’m bullish on videogames. This looks like a good play.
One thing that will not be baked into the stock price is the success of Star Craft 2 as an esport. There is a lot of upside here.
The original Star Craft (and Brood War expansion) are huge in South Korea, where there are multiple TV stations devoted solely to casting Star Craft games. Players are licensed by the government. While it’s been huge in Korea, it’s only been a relatively small movement in the rest of the world. However, since Star Craft 2 has come out, the rest of the world is getting on board with Star Craft as an esport and (more importantly) as a spectator sport.
Star Craft 2 is slowly taking over social video sites. Channels like Husky Starcraft and HD Starcraft have over 300,000 subscribers. The livestreams of Star Craft 2 players (good list here provided by Team Liquid) are often the most streamed channels on live streaming sites like UStream and Justin.TV. The game has an audience.
Blizzard also already collects royalty fees from companies running Star Craft 2 tournaments, such as the GomTV GSL in South Korea and the Major League Gaming events in the United States. These royalty fees are super small right now, and not a major source of revenue for a $16 Billion company. The business model now is the use the tournaments as a way to get exposure for the games and keep them relevant between production cycles. However, I think there is a large business in broadcasting these esport games in the future. Activision Blizzard will have the experience to take advantage of it.
These folks emailed us and they have some decent finance calculators on their site: Ultimate Calculators
I found the loan application one particularly interesting… haven’t seen that one before.
Cheers!
I said previously that I would maintain a wiki and blog at the same time. That way with the wiki you get a good overall view of things, and the blog are thoughts from the moment.
Well…
That did not work out so well. My blog went downhill, and so did my wiki. I got nowhere!
Then I decided to look back and see what is going on. I realized something interesting, and it was blogging is not where its at anymore. Recently I joined a chat room and people asked me, “what’s my twitter id”. I gave them my id (christianhgross), but added I hardly twitter.
Recently a very good friend of mine came by to visit me. Josh works at Microsoft and his job is to keep in close contact to the community. What struck me as interesting was that he blogged a bit, but twittered more. So after I joined the chat room I thought, if Josh twitters maybe there is something to this.
Indeed there is…
Hence from this point on I have come to the hard decision that I will broadcast my twitters to my blog, and write my articles on my wiki.
As they say, adapt and survive, and I am adapting…
I still own a few shares of GOOG. It’s felt overpriced recently, but I’m holding onto a minimal amount at all times and trying to add more over time. So I’m hoping the price drops a bunch so I can pick up more cheaply.
Do a search here for GOOG for my previous thoughts (years old), but I basically think that the world will continue to be drowned in data. Google’s goal to organize the world’s information and their expertise at scaling Internet apps puts them in a great position to be a contender in just about any future technology.
Anyway, I’ve recently read Phil Town’s new book Payback Time. The title there, like most investing books lately, takes advantage of the recent drop in the stock market to entice readers. However the content and tone of the book isn’t as whiny as you might think, and is generally applicable to investors in all markets.
We were big fans of the first Phil Town book, Rule #1, mostly because it described things in layman’s terms and gave readers a clear method for putting the books theories into practice.
Payback Time works the same way and repeats a lot of the ideas in Rule #1. There are still the 4 M’s (Meaning, Moat, Margin of Safety, and Management) for example, but instead of using technical analysis (in the form of Rule #1′s red/green arrows) Payback Time recommends a form of dollar cost averaging, Town calls “stock piling”.
Of course, Town has a section in the book titled “Why This Isn’t Dollar Cost Averaging” that I’ll try to summarize here. Town says (emphasis his), “DCA means investing a fixed dollar amount at fixed intervals no matter what the price of a given stock.” He then goes on to list the numerous flaws and criticisms of dollar cost averaging.
For further reading, Christian writes why you should consider “Averaging Down“, and here Steve “The Undertrader” describes his stockpiling-like investing style.)
So Town calls stockpiling “DCA with a brain”. You don’t buy any time or on predefined schedules. You buy when the stock price is within your Margin of Safety. And you don’t hold indefinitely. You sell if the stock price goes about your Margin of Safety.
I’ll buy that. And I like this a little better than using “the tools” or “the arrows” or technical analysis to judge a stock because it’s one less thing to calculate. If you are calculating a “sticker price” and MOS price anyway, might as well use them to trade. If you thought of stocks as commodities or discounted dollars, this kind of trading would make even more sense. I value $1 at $1. If the market is pricing it at $0.80, I buy. If the market is calculating it at $1.10, I sell. Sure I could have waited for the price to drop to $0.70 before buying, or $1.20 before selling. I would have made a better trade, but I’m always making a winning trade if I buy when the price is lower than what I value it at (plus my MOS) and sell when the price is higher than I value it at.
So the Payback Time strategy should be a little easier to follow than the technical analysis from Rule #1. Well, to a certain extent. Town introduces another calculation called “the payback time” (maybe that’s the true meaning of the title) to pretty much calculate the MOS from a different angle. And he brings technical analysis back in, talking about support and resistance levels. Here’s a good recent analysis from Hipegg on Google.
Alright, so that out of the way, let me share some of my calculations on Google stock (GOOG). I’m basically running through the Payback Time Spreadsheet found on the Payback Time website. It’s a handy tool.
Here I would want to do a large Google Moat analysis, but I’m lazy. So I’ll say hey, they have a huge margin and virtual monopoly in search. And while there stance is vulnerable (MSFT is gaining ground lately), this moat is fairly stable because (1) it takes a lot of knowledge and investment to serve billions of searches a day quickly and (2) advertisers and publishers benefit from consolidation and drive the market towards one winner.
Charlie Munger and Warren Buffet at Berkshire Hathaway like Google’s moat. Not sure if they are investing. Buffet shies away from tech.
Here I would want to do a large Management analysis, but I’m lazy. I’ll say hey, these guys strive to do no evil. Page and Brin seem like great folks who are in it for the long term. They are standing up to China vs. going for short term profits. They don’t fudge their numbers (other than tweaking the Adsense lever). They don’t mess around with finance gimmicks like splits, etc. They are smart and clearly have a better understanding of the future than the average C-Level exec.
Some numbers:
* 5 year EPS Growth has averaged 34%.
* 3 year OPS (operating cash flow per share) Growth has averaged 17%.
* 5 year Sales Growth has averaged 40%.
* 5 year BVPS (book value per share) Growth has averaged 58%.
Nice all around. You usually want to go as far back as you can on these numbers. We can’t go much further back than 5 years because Google only started trading in 2004. If you wanted to be more conservative, you could use more recent (last 2-3 years) numbers since Google basically went from nothing to a top 10 company in 2 years and since then has grown a little slower.
Some more numbers:
* ROIC (Return on Invested Capital) = 18%
* ROE (Return on Equity) = 18%
Nice again. BTW, you can get some of these numbers in chart and spreadsheet form at YCharts.
Google has no debt!
Now, let’s calculate a sticker price and MOS.
* EPS = 21.97 (according to Yahoo)
* Earnings Growth = 14% (That’s my number. Historically we’re looking at 34%, and analysts are estimating 19% for next year. Should do more “main street” analysis of this considering how large Google is.)
* Future P/E = 24 (that’s about average for Google. 2x earnings would be 28)
* MARR = 15% (This is my “minimal acceptable rate of return, i.e. I want to make at least this much per year)
* MOS% = 25% (Ideally you would want 50%, but that is hard to get with GOOG and I’m pretty confident in them.)
I get MOS numbers then like:
* EPS = 21.97
* EPS in 10 Years = $81.45
* Stock Price in 10 Years = $1,954.74
* Sticker Price Today = $483.18
* MOS Price = 3/4 = $362.39
So according to this, I am a seller above $483.18 and I am a buyer under $362.39.
For completeness, here is the Payback Time Analysis using these numbers. To recoup my investment in 8 years, I’d want to buy GOOG at $331.43. That basically means that if you bought all of GOOG at $331.43, you would earn that back in Revenues (assuming our growth numbers) in 8 years. That would be a good investment if you were buying a franchise, and should be a good investment when buying stock as well.
I hope this was informative. Feel free to pick apart my numbers. In particular, I am always interested in pondering what a company that grows at 14%+ for 10 years would look like in the future. I’ll do that in a future post.
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At the beginning of May I said that the Greek demonstrations would drop off dramatically. Of course nobody listened… What has happened? Oh yeah the Greek demonstrations have dropped off dramatically.
So why did this happen? It is because the English speaking media does not understand mainland Europe. In fact the English speaking media is pretty ignorant of everything that is not English speaking.
Let me illustrate another misunderstanding. These folks are talking how the Euro dropping is bad, and that the European economies will do bad. YET, and here is the big YET… Oh this will be great to take a European vacation.
Don’t you get it? If you think on the one hand that the European mainland will collapse, but then travel there on vacation the economy will grow! In fact I hear it among all of the American’s. Oh great now we can vacation in Europe on the cheap. That means the Euro-zone economies will expand, while the strengthening currencies just keep loosing business. This is pure Schizophrenia!
Remember that mainland Europe does not care that much for financial engineering, and in a Swiss poll only one guy on the street said what was happening is a problem. Want to know why? Because he is a fund manager. The rest are just average people who really don’t care, or more aptly put they just want to make sure they make more money.
Having the Euro tank when Germany introduces stronger financial regulations only emboldens the people to stand behind the Euro. Take it from the perspective of somebody on the street. If they see stronger hedge fund regulations and stronger financial regulations resulting in the market tanking the person on the street is going to say, “good for the government”. It is populism in its purest form, but the hedgies are making themselves easy targets.
The hedgies are as stupid and greedy as ever. They think because they can push around the governments in America or Great Britain that they can do the same on mainland Europe. Sorry hedgies you are dumb! GIVE IT UP! The more you push the easier it will be to push through regulations against you. And the more, I as another market participant will have to suffer because of your lunacy!
What I wonder is how long the USA is going to watch this. After all with a strengthening dollar the US competitiveness has just gone out the window. How long before the US starts clamping down. After all, the populists fuse for the financial community has gotten mighty short.
