Trends for Major Indices as of Friday, January 24th 2020

CNBC says American Express earnings beat expectations on strong card fee revenues, shares rise.

Nasdaq

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Up

S&P

The S&P closed just under the 10 DMA, switching the short-term trend to down. We will see if things retrace to the 50 DMA like the Russell 2000 did.

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Down

Russell 2000

The Russell 2000 closed just below the 50 DMA, switching the intermediate trend to down.

  • Long-term: Up
  • Intermediate: Down
  • Short-term: Down

Bitcoin SV Wash Trading

Rick D. at BeInCrypto.com digs into a theory for the recent spikes in the Bitcoin SV price. Is it from a BSV miner mining BCH instead, selling that BCH, then “wash trading” BSV on exchanges which pumps the volume and price.

The original Twitter thread by @vinarmani can be found here.

It’s actually a pretty genius gambit with essentially no downside. He can actually use this tactic to keep BSV at basic parity with BCH.

@vinarmani on Twitter

Trends for Major Indices as of Wednesday, January 22nd 2020

CNBC says Tesla short-sellers could help Elon Musk score a payday worth hundreds of millions.

Nasdaq

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Up

S&P

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Up

Russell 2000

The Russel 2000 closed just below it’s 10 day moving average, changing the short-term trend to down.

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Down

Have a happy Wednesday!

How I Sold My Bitcoin SV Coins

The last time I wrote about Bitcoin on the blog here was back in 2013. Bitcoin had just hit $1000 per BTC and I was still bullish.

Since then, Bitcoin has “forked” a number of times. Similar to open source software, if stake holders disagree about how to build out the Bitcoin software and platform, they can fork the platform and let the market decide which fork to support. It’s not a winner take all proposition either. There is room for multiple variants of cryptocurrency. The Coinbase blog has a good post on what forks are.

Wikipedia has a list of the larger Bitcoin forks. The biggest fork was the Bitcoin Cash fork on August 1, 2017. Bitcoin Cash itself forked on November 15, 2018 into Bitcoin Cash ABC and Bitcoin SV (Satoshi’s Vision).

I could talk about forks and the various pros and cons of each flavor of Bitcion, but for this post I’m going to focus on the technicalities of gaining access to the “new” Bitcoin SV coins and how I “sold” them.

If you hold your own Bitcoin and other cryptocurrencies, this fork thing is going to happen every once in a while, and you’ll need to spend some time to claim your “free money”. These are the steps I used to sell my BSV specifically, but the general outline would be used for claiming any fork. Just different software or exchanges might be involved.

Step 1: Own the private key or seed phrase.

To really “own” your Bitcoin, you need to own the private key for the wallet the Bitcoins are stored in. The actual private key is a 256-bit number. The more typical version you will interact with is the “seed phrase” that your wallet and private key were generated from. This will be 12 to 24 words that almost all wallet software will generate for you when setting up a new wallet.

If you store your coins in Coinbase or something similar, you may not “own” your private keys. This is actually not a terrible idea if you don’t trust yourself to keep your key safe and not forget it. In this case, Coinbase will wait until a new fork gets valuable or important enough to worry about and then split your coins for you and issue you an appropriate amount of coins on the new fork’s chain. They did this with Bitcoin Cash and later with Bitcoin SV. If you want to claim your forked coins earlier though, you’ll need to do it yourself.

My seed phrase then is basically the password needed to spend or move my Bitcoin. After a fork, the same exact seed phrase will work to spend coins on either blockchain.

So I could use my Bitcoin Cash seed phrase to “claim” my coins in Bitcoin SV and move those coins wherever I want. The problem with this is that I don’t necessarily trust the people behind Bitcoin SV or the wallet I would use. I am worried that using the “password” for my Bitcoin Cash wallet to spend my Bitcoin SV will allow someone else to steal my more valuable Bitcoin Cash coins.

So I tried to protect my Bitcoin Cash first.

Step 2: Create a new wallet for your old Bitcoin cash and send your coins there.

I used Electron Cash to create a new wallet. I then sent a test transaction from my old wallet to my new wallet, followed by a transaction to send all of my Bitcoin Cash into the new wallet.

I now have a different set of seed phrase words to access my Bitcoin Cash.

Step 3: Claim your Bitcoin SV using Bitcoin SV wallet software.

I chose to use the ElectrumSV wallet to access my BSV. ElectrumSV is an open source wallet, and while I didn’t compile from source or even double check the code myself for malware or back doors, being open source makes it less likely that this wallet is sending my keys back to a malicious third party.

Once I booted up ElectrumSV, I just chose the options to restore a wallet from my seed phrase and there my coins were.

Step 4: Move your Bitcoin SV into an exchange.

I’ve been investing in Bitcoin and other cryptocurrencies for a while, but I’ve never really used an exchange outside of Coinbase. I’ve created accounts on a few exchanges, but mostly just tested the UI.

I read that the CoinEx exchange is pretty popular, especially for trading BSV, and so I setup an account there. I was surprised that I didn’t need to give too much personal information to start my account. I confirmed my email address, set up Googlel Authenticator, and then I was ready to go.

As a new user, I was able to withdraw up to $10,000 USD worth of assets per day. If you want to withdraw more, you need to verify more information or wait. The amount of BSV I had would only take a couple days to withdraw.

Step 5: Exchange your BSV for BCH or Bitcoin

CoinEx gave me an address to add BSV to my “assets” there. I sent a small test amount, which showed up after a few confirmations.

Step 6: Withdraw your BCH or Bitcoin from the exchange.

I then exchanged that BSV for BCH using the exchange. And then “withdrew” those BCH into my Coinbase account.

After the withdrawl went through (it took about an hour’s worth of confirmations), I moved all of my BSV into CoinEx, exchanged it, and withdrew it to Coinbase.

Step 7: Exchange your BCH or Bitcoin for cash on Coinbase.

You could technically withdraw cash from CoinEx, but since I’m comfortable with Coinbase, I moved my coins there to convert to USD.

In this case, I think I am going to hold onto the BCH for a bit. I also left some BCH in CoinEx to play around with. I’m trying to come up with a trading strategy to test there, but I’m mostly a longer term investor, so I’m struggling to come up with something.

Since I’ve sold my BSV, it has rallied $75 more dollars per coin, while Bitcoin and Bitcoin Cash have stayed flat. I feel that BSV is a scam in some sense, but there might be some virtue to it. I’ve been out of the loop. I think there is some value in making a coin that is useful and good for consumers and users, but also good from a mining standpoint to get them more involved. Maybe BSV will do that better than BCH or BTC.

Trends for Major Indices as of Thursday January 16th 2020

Here are the trends for the major indices today. Everything closed up and is trending up.

Nasdaq

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Up

S&P 500

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Up

Russell 2000

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Up

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.

When does Twitter Stock become cheap?

twitter-bird-white-on-blue-300pxI’m reading the book Sapiens: A Brief History of Humankind by Yuval Noah Harari. In a section on the Agricultural revolution, Harari reminds us that while farming allowed human populations to grow, the quality of life for the average farmer was worse than the average hunter-gatherer. Farmers worked longer hours, with worse health, and generally lived more repetitive (and possibly more boring) lives than their hunter-gatherer counterparts.

Still, living in cities with farms to work on meant more babies, which meant more people with more reason to cooperate, leading over the years to the complicated network of nations and societies we live in today. Similarly, are modern day humans are working harder than our ancestors worked. Are we living longer, but less fulfilling lives?

It’s unclear to me whether tools like Twitter, which are taking up more and more of our precious time, are making our lives better or worse. It does seem to me however, that Twitter and the Internet in general are bringing people together cognitively in the same way that farms brought people together physically. While sporting events, movie launches, wars and riots happen in different places all over the globe, everyone can share in these experiences in the same virtual space in real time scrolling through Twitter feeds 140 characters at a time.

What does this have to do with Twitter as a company and stock? I’m not sure, but hopefully we can come together here to figure out if Twitter is a good investment at $22.45 per share.

Twitter (TWTR) stock is trading at around $22.45 a share right now, putting it at a market cap of $15.7 Billion. They have about $4B in cash, revenues of $2-$B, and trailing 12 month earnings per share of -$0.86 (negative 86 cents). Twitter IPO’d around $45 per share, hit an all time high around $75 per share earlier this year, and has since tumbled to the current price.

Is Twitter stock cheap yet?

The answer to this depends on what metrics you are using for valuation. Technology companies like Twitter, which have ubiquitous use but indirect methods of making money, are especially hard to value. I’ll try my best.

For mature companies there are two benchmarks that I like to use when valuing a company. (1) A price to earnings ration (PE) of 15. (2) A market cap that is 2x revenue.

Why these numbers? I think that’s a good topic for another post or ten, but in short a PE of 15 is roughly the long term average PE for the entire stock market. Similarly 2x revenue is fairly average for companies across industries and maps pretty well to the 15 PE if you consider an operating margin around 10-20%.

These numbers are most definitely rules of thumb and shouldn’t be held sacred, however they are a good starting point for analyzing a stock. If a stock doesn’t trade at a 15 PE or 2x revenue, that is normal and expected, but you can learn a lot by asking WHY the stock is trading at a different PE or revenue number. Is there something structural about the company that makes it more or less profitable than others? Or, as we’ll find is the case with Twitter, do we need to wait around for revenue growth to justify the market cap.

Where does Twitter stand from a revenue and PE perspective? As of writing…

Stock Price: $22.45
Market Cap: $15.7B
PE: N/A (negative  86 cents per share earnings)
Revenue: 7x Revenue (estimated $2.2B in 2015)

Not looking good, but let’s ask why the PE is negative and why the revenue multiple is so high.

Why is the Twitter PE negative?

Twitter is spending more money than it makes. Obviously this can’t be sustained, but it makes sense for young companies that are transitioning from a user growth phase into a revenue growth phase.

Twitter earnings are also hard to figure out due to the large amount of stock options they use to compensate their employees which makes for a large difference between their GAAP (generally accepted accounting principles) and non-GAAP (shit we just made up) earnings numbers. This post is from 2014, but explains the difference in Twitter’s case pretty well.

As an aside, non-GAAP numbers are fine in principle and often help investors to understand special cases with regards to how a company is making money. More and more companies though are paying their employees in stock options, effectively moving that expense off the books by using non-GAAP numbers or diluting outstanding shares. It makes our job as investors harder.

The bottom line for Twitter’s PE is that negative earnings are obviously bad and if you invest in Twitter, you have to have some expectation that earnings will turn around at some point in the future. Hopefully sometimes soon before cash reserves run out. The good news is that Twitter’s earnings are trending up and future estimates are positive.

Specifically, to justify a $15B market cap at a 15 PE, Twitter would need to generate earnings of $1B per year. As we’ll see below, getting to the revenue and operating margin to bring in $1B in earnings should be very doable for Twitter a few years out.

Why is Twitter’s revenue multiple so high?

Twitter is currently trading at 7x revenue, which is above our 2x revenue benchmark. Why?

Again, Twitter is growing and investors know this. The 2x benchmark is for a mature company, i.e. one that is not growing or growing slowly. Twitter revenues are growing somewhere north of 50% quarter over quarter and year over year. At these rates, $2B in revenue in 2015 becomes $3B in revenue in 2016, $4.5B in 2017, etc.

The obvious next questions are if current growth rates can last (hint: they never do), how they will trend in the future, and if the company will be able to make a profit on those future revenues.

How big can Twitter revenue grow?

I’ll use a really simple method to calculate further revenues, which I’ll call “Twitter will make as much money as Facebook does”. More specifically, I suspect that Twitter will be able to make as much per user as Facebook is.

Anecdotally, Twitter’s new “put a sponsored tweet where you expect to see replies or click to reply” tactic is super annoying and probably making bank for them. I expect their revenue to beat in their next earnings report.

Facebook has about 4x the number of monthly active users (1.2B vs 300mm) but is making 8x the revenue ($17.4B vs $2.B). I believe that Twitter can close the gap and should be able to make at least $4.4B from their 300mm users. This would put their revenue multiple at a respectable 3x. If we expect their user numbers to grow as well, they can very reasonably reach a 2x revenue multiple in 2-4 years.

A 20-25% profit margin (reasonable for an Internet services company) on $4.4B in revenues leads to ~$1B in earnings or that 15 PE we’re looking for as well.

We’re just doing math here, so it’s important for everyone to do their own homework to see if they think that these numbers we end up with make sense. The particulars of each company, what I would call “Main Street Analysis”, will tell you in the numbers make sense. In practice that might look like a lot of reading of earnings reports, other analysis, or general knowledge of how the business works. In our case, we’re being lazy and just saying that Twitter will have a similar trajectory that Facebook has had since IPO.

So is Twitter cheap?

Based on this analysis and the expectation that Twitter can get to $4.5B in revenue and grow respectively from there, Twitter is about fairly valued and just starting to get cheap. So I personally am considering starting a position with the expectation to add more as the price drops. I’ll probably purchase shares in my children’s brokerage accounts. (Christmas money for the win.)

If you expect Twitter to grow into more than just a platform to show ads occasionally to 300m people, you can basically get all of that extra stuff for free. The current price is inline with the straight forward, low risk, advertising business Twitter has now. So any extra revenue from Periscope, premium services, digital ID fees, or spoils collected from the governments it overthrows is gravy.

In my opinion, Twitter is very much an integral part of our society. When news happens, it happens on Twitter first. Facebook is starting to work like Twitter in this way, but I don’t see it overtaking Twitter without losing all of the other stuff we like about Facebook. The hole quick, 140 character, nonchalant nature of Twitter is actually exactly what makes it work so well. And considering they are ingrained in every news organization, business, and with every celebrity, I don’t see another service overtaking them without warning.

Assuming the general market doesn’t suffer a pull back, Twitter should be free of any new “bad news” that could move the stock lower. Weak investors should be shaken out soon, and if Twitter continues to grow as I expect it to, I suspect a slow rise with each new earnings report. Look for the stock to trade a bit lower, but turn around soon, and then rise up steadily from there.