Jason’s Portfolio April 2016

I thought it my be useful for myself and others if I list out the stocks in my portfolio and watch list. I have informal categories for each stock I own based on whether I’m looking to buy, hold, or sell. I’d like to make those categories a bit more formal in this post and going forward.

The “Method”

There are really two things I’m tracking here for each stock in the portfolio.

One is what mode I’m in with regards to the stock; whether I am watching, buying, holding, or selling the stock.

The second item tracked in this list is the value of the stock; if I think the stock is undervalued, fairly valued, or overvalued.

Note that the mode is not a recommendation. It’s just how I am personally approaching the stock. The mode I list is based primarily on how large my position is in the stock. If I say I am “buying” a stock, I could be buying it right now if it’s undervalued or I might be waiting for the price to fall (sometimes as much as 50%) before getting in. Similarly, if I list the mode as sell, it just means that I have too much of that stock and need to find the right time and price to sell.

The Value on the other hand can be considered my opinion of whether a stock is a good buy or not based on the current price. I am not a professional… disclaimer disclaimer… I should really get the correct language to keep people from suing me… but if I say something is undervalued I think the stock price is going to be higher 5 years out and if I say it’s overvalued I think the stock price is going to be unchanged or lower 5 years out.

Here are the categories again.

Mode

  • Watching
  • Buying
  • Holding
  • Selling

Value

  • ? (Need to research more.)
  • Undervalued
  • Fairly valued
  • Overvalued

Ideally I will be buying stocks when I think they are undervalued and selling them when they are overvalued, but whether I am buying or selling depends on some other things.

To skip to the list, you can load the Google Spreadsheet here. Or read below for an explanation of each “mode” and “value” category.

Modes

The “mode” I list for each stock is not a recommendation to buy or sell. It’s simply how I am approaching a stock. If I say I am “buying” a stock, I am really looking to buy. It just means I wish I owned more of this stock. I might be buying the stock at the current price or just as often I will be waiting for a stock to pull back (maybe as much as 50%) before really committing to it.

Similarly, if I say I am “selling” a stock, I may be selling it right now but just as often I am waiting to sell it. This really just means that I have more of this stock than I need and I could sell some to purchase stocks that I think are undervalued. I am almost never selling 100% of my position in a stock.

Here are some more details on each of the above “modes” I might be in with regards to the stocks in my portfolio. At any given time I’m either watching, buying, holding, or selling.

Watching

These are stocks that are on my radar, but I haven’t yet invested in. They might be a company that I am confident in, but need to do more research on to find a fair price to buy the stock at. Or they are a stock that I think is “on sale”, but I need to do more research on to find out if the underlying company is strong.

Buying

These are stocks I am looking to buy more of. Usually I am buying when the stock is also undervalued, but I’ll sometimes open positions in stocks when they are fairly valued with the hopes that they will drop further.

When buying, I try to open a 25-50% position and then buy in 25% chunks for each 10-20% drop in stock price. So if I had $10k to put toward a position, I would open a position with $5k and then buy another $2.5k when the stock price dropped, and another $2.5k if it dropped further. These are rough numbers. The specific numbers will depend on the particular stock and situation. But I’m generally dollar cost averaging into these stocks as the price bottoms out.

Holding

These are stocks that I am invested in and holding. I’m not buying more, either because my position is too large a % of my total portfolio or because the stock is fairly valued or slightly overvalued. I’m not selling either because in general I’m more interested in acquiring as much stock as possible in companies I think are strong vs trying to make “trades”.

Selling

These are stocks that have run up for me and I’m looking to sell. I generally won’t sell stock unless I need the money to purchase something else that is on sale (from my Buy list) or I think the market is heading downward and I want some cash to hunt for opportunities.

Value

How do I determine if a stock is undervalued, fairly valued, or overvalued? In general, I try to guess how much revenue a company is going to be making 5-15 years out and figure out what a fair price would be assuming they get there and then discount that price based on risk factors. I use an analysis similar to what Phil Town does in his book Payback Time. You can see an example of that kind of analysis I did for GOOG here.

The list below will contain just one word, but behind that is typically a lot of research, earnings calls listened to, model spreadsheets, and deep thinking about the technicals and fundamentals of the stock and company. I also try to do some “main street” thinking by considering what the company actually sells, how much they think they are going to sell and at what margins/etc. It’s awesome to see a company like Apple growing at 25% per year, but are there enough people in the world to buy enough iPhones for them to double their revenue again?

Here are some general thoughts about each category of value.

? More Research Needed

If its been to long since the last time I researched a stock, I’ll put a ? in the value column. Maybe the stock price has run up and I’m not sure if it’s still undervalued. Maybe a few earnings reports have come in and my numbers need to be updated to take new numbers and growth rates into account.

Undervalued

These stocks are either mature companies with low PEs or revenue multiples (like Apple) or young companies where (in my opinion) the market is undervaluing the future earnings potential of the company (like Tesla). If a stock is in this category, I generally expect it to grow 2-4x over the next five years.

Unless I already have a large position, I should be looking to buy more of these stocks. If you asked me for a “stock tip”, these would be the stocks I would talk about.

Note however that undervalued doesn’t mean “will not fall in price”. Stock prices can always go lower, especially stocks that have had a good run recently. Stocks that are up 100% over the past year could still be undervalued. You’ll just have to be more careful when buying them (i.e. dollar cost average).

Fairly Valued

These stocks are priced about right based on the models I’m using. I’m generally holding these stocks and letting them run.

Over Valued

These stocks are highly priced (or “frothy”) based on the models I’m using. These are probably “momentum” stocks that the market is taking higher and higher. I’m generally letting my winners run, but if I need cash to purchase more of a stock in the undervalued category, these are the stocks I’m going to sell first.

My Portfolio

These are stocks that are on my watch list or stocks I own some amount of in my retirement account, my wife’s retirement account, or a couple of personal accounts I hold in my children’s names. For each, I’ll say what “mode” I’m in for that stock and how I think it’s “valued”. A “?” in the value column means that I need to update my research based on the current stock price and fundamentals.

I’ll keep an updated spreadsheet of this portfolio in Google Docs publicly here. Or you can see the list from the time of this blog post below.

Company Ticker Mode Value
Activision Blizzard ATVI Hold Fair
Amazon AMZN Buy ?
Apple AAPL Buy Undervalued
Disney DIS Hold ?
Google GOOGL Hold Fair
Hasboro HAS Hold ?
Netflix NFLX Hold Fair
Nintendo NTDOY Buy Undervalued
PayPal PYPL Buy ?
Solar City SCTY Buy Undervalued
Starbucks SBUX Hold ?
Square Enix SQNXF Buy Undervalued
Tesla TSLA Hold Undervalued
Take Two TTWO Hold ?
Twitter TWTR Buy Undervalued
Zynga ZNGA Buy Undervalued

Notice that this is almost 100% technology stocks, which does leave me undiversified by industry. However, technology companies are something I feel I have a lot of domain knowledge over which helps me to pick the winners. We also invest part of each of our accounts in total market and world market index funds.

“Payback Time” Analysis for GOOG

Image representing Google as depicted in Crunc...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.

Phil Town Payback TimeAnyway, 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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To Disclose or Not Disclose?

Jason brought up a good point:

BTW, those Fast Money guys don’t seem as concerned about disclosing their positions or trading under altered rules like Jim Cramer is.

I wonder why that is.

It’s tough though. If you disclose, your trying to pump/dump stocks. If you don’t, you’re hiding stuff.

I think the reason why the Fast Money people don’t mention all of their holdings is because they are traders/investors. It’s like Buffett where he only mentions things after they have occurred.

(more…)

Crystallex (AMEX:KRY), Las Cristinas Update

You guys may know that I have a position in Crystallex (AMEX: KRY). If you follow the stock, you know that yesterday was a bad day. There was this press release, which speaks of… well let me just quote some of it:

Crystallex International Corporation … announced today that, subject to receipt of all necessary regulatory and shareholder approvals, it has agreed to amend the terms of certain unlisted common share purchase warrants … held by two holders in the United States. The proposed amendment is in relation to 2,272,727 Warrants originally issued by the Corporation as part of an issuance of 4,545,455 special warrants (each special warrant consisting of one common share and one-half of one Warrant) completed on August 29, 2003. Each Warrant entitles the holder thereof to acquire one common share in the capital of the Corporation at an exercise price of US$2.75 per share until September 15, 2006.

If you’re me, you have little idea what this means. I’ll take a stab. Crystallex has about 220 million shares outstanding. Each of the “warrants” described above includes one common share of KRY stock. And since those warrants can be exercised at $2.75, starting yesterday these 2 US dudes could sell their 2 million shares (about 1%) of KRY at $2.75 and make a quick $1 profit. (Note: the actual number of warrants could be larger; the math is pretty tricky.)

I can’t say we weren’t warned before. Robutnic pointed this out back in April in a comment to my original post here. TerryB responded in the comments, that these guys with the warrants aren’t normal investors. So they wouldn’t be so inclined to sell right away.

There was supposedly some bigger news yesterday that I only picked up on while watching Madd Money last night. I can’t find anything in the wires, but Cramer said that rumors are spreading that Venezuela will try to get as much as 50% of the profits from the mine. I’ll try to post links and more on this when I get something. (UPDATE: See the article linked below in the “Further Reading” section for a good overview of how the rumors got started yesterday.)
Understandably, the stock dropped 50% yesterday (which makes sense if they’re looking at 50% of the profit) then had a decent rebound to close just over $3. As I write this, the stock is plummeting again and trading at the $2.50 level.

Before I leave, here is Crystallex’s response to all of this. They’ve put out a press release: Crystallex Confirms Las Cristinas Position. The title is a bit forward, as the Minister of the Environment and Natural Resources (“MARN”) hasn’t yet given the okay for production (this is what we are all waiting for). However the rest of the government down there is prodding:

Just last week the Permanent Commission of the National Assembly petitioned the Minister of the Environment and Natural Resources (“MARN”) in support of Crystallex commencing the Las Cristinas project as soon as possible. In addition the media in Venezuela reported last week that Deputy Ricardo Gutierrez, President of the Commission of Mines of the National Assembly had met with the Mayor of Sifontes district to express their joint support for the rapid commencement of the Las Cristinas project by Crystallex. Deputy Gutierrez also stated that he had arranged to meet with the Minister of MARN to express his commission’s support for the rapid development of the Las Cristinas project by Crystallex.”

However, the press release doesn’t deny the rumors brought up yesterday. I just reread the press release, and it states:

we have received no request or proposal for any change to our operating contract.

And doesn’t say anything about the special warrants. What does all this mean? Where will the stock go? This is speculation at its craziest. This could be the begining of the end for this company. Can we trust the management? On the other hand, if the rumors are just rumors, this is a great buying opportunity. I’m getting tired of this trade and working on my exit strategy. More on that later.

Further Reading:
– The article I wrote when I first purchased shares: Cramer’s Crystallex Play.
– A great article that came out after I published this: Crystallex Burned Again in Venezuelan Sell-Off Frenzy by Jon A. Nones

Optimal Strategy for State Lotteries

Investing can be tough some times. Wouldn’t it be great if you just won the lottery? Man, that would set you for life. Seriously.

Now, we’re not suggesting you run to the closest mini-mart with your life savings. The odds of winning the Big Game (a multi-state lottery open to adults in Massachusetts, Maryland, Georgia, Illinois, Michigan, New Jersey, and Virginia) are roughly 70 Million to 1. That is only slightly better than your chances of making money going long on Overstock.com.

So we all know playing the lottery is a suckers game, but does that mean you should avoid it entirely. The question came up for me when a group at the office I work at started a lottery pool. These are “clubs” where co-workers pool money together in order to increase their chances of winning. If the group (with about 20 members now) hits the $300 Million jackpot, they’ll split it 20 ways. Cut $300M in half for taking the cash option and split it 20 ways, and you get $7.5 Million per person. Not too shabby.

Anyway, I didn’t contribute to the pool the first few times they played since I know how unlikely it is to hit the lottery. Take this analogy from an article by Kevin Devlin entitled Lottery Mania:

Well, imagine laying standard playing cards end to end from New York to San Francisco. The underside of just one of those cards is marked. Start to drive across country, and at some point stop and pick up a card. If you’ve chosen the marked card, you win the jackpot. Chose any other card and you lose. How much would you be willing to pay to play this game? In terms of the odds, you’ve just played the Big Game.

Makes you feel good about blowing your weekend finding a good oil stock to invest in, doesn’t it? Still, even though the odds are so terrible, there is a time to play. I mean isn’t it work about $3 per week to ensure that if my entire office became millionaires I wouldn’t be left out. “Jason, we hit. We hit! Oh… you didn’t enter the pool this week? I’m so sorry. Well, good luck with the project; I’m off to Fiji.” This kind of reasoning aligns with Kevin Devlin’s suggestion for playing the lottery (emphasis mine):

However you look at it, the odds against winning the Big Game jackpot are truly staggering. Does that mean that the best strategy is not to play at all? Oddly enough, the optimal strategy is to play, but to restrict your wager to an amount of money that is truly of no value to you.

Optimal strategy #1 is to play the lottery with a sum of money “that is truly of no value to you”. $3 a week is right about at my “no-value” level; so I shouldn’t feel bad blowing it on the lottery. In addition, $3 is well worth the entertainment I get from anticipating the results and the comradeship that is created by sharing the moment with my co-workers.

So what is optimal strategy #2? While strategy #1 focuses on minimizing the impact to your finances (in perception at least), strategy #2 will focus on maximizing your odds to win. To understand this strategy, I’ll describe a very simple lottery scenario.

The PA State Lottery Association has gone crazy. They’ve setup a lottery in which the drawing is of just 1 number, ranging from 1 to 3. In any given day, the lotto number could be 1, 2, or 3. Let’s figure the odds if you played $1 (or 1 entry) per day for 3 days. This is easy to do; just multiple the chance of losing in any given day by 3 and subtract that from 1.

2/3 * 2/3 * 2/3 = ~0.3 or a 30% chance of hitting nothing over 3 days.

1.0 – 0.3 = 0.7 or a 70% chance of winning over 3 days.

What if you just played $3 on the first day? Obviously your chance of winning would be 100% since you could cover all 3 numbers. The lesson here is that playing all of your lottery budget in one drawing is going to get you better odds that playing every day or every week.

Now don’t get too excited. The difference in chance of winning using this strategy goes down the larger the possible combinations are. So you’re not going to increase your chances of winning the Big Game by 30%. Let’s do some calculations to see how much you would increase you chances by playing $156 in one drawing rather than $3 per week.

Formula:
1 – [chance of losing] ^ [number of times playing]

$3 per Week:
1 – (69,999,997 / 70,000,000)^52 = 0.00000233%

$156 in One Shot:
1 – (69,999,844 / 70,000,000)^1 = 0.00000233%

What gives here! Well, turns out that my calculator (Excel) can’t even tell the difference in strategies with these huge numbers. But if you’re an astronomer (astrologers have their own strategy by the way) or used to dealing with really big numbers, you might be moved by strategy #2.

Also notice that strategy #2 goes completely against strategy #1. $156 is an amount of money that has meaning for me. So it would be hard to part with on a long-shot gamble.

Hopefully we here at InvestorGeeks and others in the blogging community can help you think of some more fruitful things to do with your money. But you also shouldn’t feel bad playing a few bucks each week as long as you won’t miss the money. Good luck.