November 4th, 2013 by Reuben Advani
If someone offered to sell you a dollar today plus several more dollars over the next few years all for one price, how much would you pay? $10? $12? Would you pay several hundred dollars? If you own stock in the likes of Facebook , Amazon, or Netflix you just might be willing to pay this amount. Cheap money and investor euphoria are driving PE multiples to stratospheric levels and the question many investors are starting to ask is whether 2013 is turning into 1999 all over again. Taking a closer look at these companies leads us to our answer which is no. Here’s why:
1. Businesses are more global now than ever before. Companies can expand overseas just as easily as they are expanding within the U.S. In many cases, the Chinese market may hold even greater opportunities than the U.S. market. The kind of growth priced into high multiple stocks can be realized if these companies effectively execute a launch in overseas markets.
2. Companies today have stronger balance sheets than the high fliers from over a decade ago. Today’s companies have galvanized their reserves and can withstand the invariable economic bumps that may surface along the way.
3. Companies today are utilizing technology to streamline operations and manage expenses. While profits have yet to reach the levels needed to justify high valuations, it’s quite possible that these technologies will be able to eliminate more expenses.
4. These companies are market leaders in defined spaces. . Unlike Internet companies from the 1990’s, these companies have defined business models and a plan for growth.
5. Subscribers and users are worth more now than before. Sure, the Internet companies of the 1990’s sought to attract users but they were unable to understand their behavior. Today, online businesses not only attract customers but they analyze and monetize their behavior. This trend is likely to continue and will lead to greater profits.
Few can deny that lofty valuations are unsettling. Any macroeconomic disruption can bring these stocks tumbling down. But these companies are here to stay and with few smart moves and a little bit of luck, investors might just be rewarded.
October 3rd, 2013 by Reuben Advani
What’s the one thing that makes markets nervous consistently? Answer: uncertainty. Yet again, the showdown in Washington, which has led to the government shutdown, has created unprecedented uncertainty in the financial markets. Investors are stuck playing a guessing game based on when the stalemate will end. With each passing day, the uncertainty increases thus fueling fear in the market. Most investors would rather study technical charts and financial statements but instead must speculate on what’s being discussed in closed-door meetings. Not an ideal situation.
Whoever said that market conditions are always ideal? The bottom line is that the investor public is certainly getting a raw deal from Washington. Regardless of where you lie on the political spectrum, the investor public stands to lose a lot. Or do we? True, things could be a bit rocky for some time but the investment opportunities based on solid, long-term fundamentals will prevail. So perhaps there is a silver lining in this cloud of chaos. Invest in what you understand and believe in and in the long run, you should be fine. This is probably not the first time you’ve read this advice but it’s worth a reminder during times like these. Good luck!
September 24th, 2013 by Reuben Advani
Warren Buffet claims stocks are fairly valued, a Wells Fargo analyst claims they are overvalued, and the recent IPO boom indicates there may be more upside. What factors should we consider when looking at the stock market as a whole today? Here are five things that will likely affect stock prices between now and year end:
1. Quarterly earnings. Earnings season is nearly upon us and how companies fare will offer insights as to whether the economic recovery has legs. Pay close attention to year on year sales growth.
2. The Fed. So when will Quantitative Easing end? Our days of cheap money are numbered and depending on how soon the Fed tapers will affect interest rates, which means corporations and consumers, will need to adapt.
3. Geopolitical Forces. Keep an eye on how Washington reacts to global bullies. Regardless of where you stand politically, 21st Century stock market investors clearly prefer peace over war.
4. The Debt Ceiling. Again? It’s beginning to feel a lot like Groundhog Day. Fasten your seatbelt because if Washington doesn’t reach an agreement, it could mean a bumpy ride in the stock market.
5. Housing Prices. This is more relevant now than ever. Americans need to feel the warm fuzzy feeling that comes from a good old-fashioned housing market uptrend. This helps investor confidence, which benefits the stock market.
Stay tuned. It should be an interesting fourth quarter.
September 11th, 2013 by Reuben Advani
Apple hosted a major conference yesterday at which it made a series of announcements. Unfortunately, these announcements failed to dazzle investors. The company that Steve Jobs built used to have a PT Barnum-like flare and investors and consumers couldn’t get enough of it. Whether Apple invented the next amazing gadget or simply retooled an old one, audiences rejoiced.
Today’s Apple is starting to take on a different appearance. Is the spark gone? The public is wondering what happened to the innovation and style that characterized the company’s products when Steve Jobs was at the helm. It’s probably too soon to judge Tim Cook’s performance as CEO but one thing is certain, Apple needs to make some changes sooner rather than later.
Here’s an idea (and by no means a novel one). Apple should hire the best designer in the world to manage consumer and investor expectations. This should be someone who exemplifies Apple’s style and innovation. Every Apple event, no matter its purpose, should be the greatest show on Earth. Leave the boring CEO stuff to Tim Cook and find someone to bring passion back to the brand before it’s too late.
September 5th, 2013 by Reuben Advani
Blackberry recently announced that it is up for sale and will accept bids over the next few months. This leaves many people asking, “Who in their right mind would buy it?” I may be in the minority when I say that Blackberry just might have a fighting chance in the process of finding a suitor.
Sure, the company has suffered from consistent product delays and changing consumer preferences resulting in a massive hit to the company’s market share. Top that off with the fact that fewer developers produce apps for Blackberry devices. On the surface, Blackberry seems to be on its last legs. But consider the root of the problem: Blackberry is no longer cool. Who wants to own one? I was a loyal user for years but finally reached a breaking point when friends and colleagues shot me sympathetic glances every time I answered a phone call.
If Blackberry, or a potential acquirer, were to invest heavily in marketing, this brand just might have a fighting chance. Renewed consumer interest could motivate app developers to come back to the table. Indeed, it’s a long shot but not impossible. After all, many wrote Yahoo off only a year ago and it has made a remarkable comeback.
August 27th, 2013 by Reuben Advani
With geopolitical tensions and macro-economic forces threatening recent stock market gains, many investors are trying to figure out a strategy. Buy, hold, sell, trade, nothing. Here’s a strategy that allows you to play several angles. Some time ago I posted an article on covered call writing. Covered call writing allows you to buy a stock and collect the premium on the sale of call option. That way, you lock in a gain from the premium and hopefully the added gain if the stock moves to or above the strike price at expiration. Of course, you run the risk of the stock dropping, which is offset, to some degree at least, by the premium from the call.
So here’s a variation on the covered call strategy that sometimes works when market uncertainty abounds. It’s based on covered call writing on high grade, dividend-paying stocks. In other words, these are stocks that you would be willing to buy and hold regardless of overall market conditions. You believe that even if there is a market selloff, these stocks will rebound…someday. And you’re willing to hold them. Here’s the kicker. These stocks pay juicy dividends as well. Even if you’re stuck holding these stocks, the dividends offer income while you wait for a recovery. And by selling the calls, you recognize an easy gain. Your upside is based on stock moving to or above the strike price, the call premium, and the dividend. Not a bad payout.
Let’s consider Apple. Apple stock currently sells for $500. The $510 calls expiring one month from today sell for $12. The next dividend payment, presumably sometime in November, will be around $3.00. You could buy Apple today for $500 and sell the call for $12. If the stock moves to $510 or above by the end of next month, you will have locked in a gain of $22 ($12 from the option and $10 based on the stock price increase from $500 to $510). A four percent gain in one month isn’t too shabby. Suppose Apple tumbles. You still lock in the gain from the option but it’s anyone’s guess how much you could lose on paper depending on how far the stock drops. But remember, you bought Apple because it is a stock that you believe in over the long run. And best of all, you have the next dividend payment to look forward to which is a nice income supplement while you wait.
August 21st, 2013 by Reuben Advani
This week, India’s economic decline has dominated business headlines. Currency selloffs, slower growth, crumbling stock prices, oh my! What does it all mean? In a nutshell, India is in the midst of a major economic crisis. So here’s the scoop:
India represents one of the greatest economic growth stories in history. The story of a country that broke from the bonds of colonialism and within half a century transformed itself into an economic powerhouse is certainly one for the ages. Yet with this story comes high expectations and recently, the economic indicators do not support the story. For example, the country’s economy expanded at a rate below expectations in the first quarter of this year leaving investors to question whether growth will continue to slow. Reduced liquidity and diminished investment activity is compounding problems as businesses now face capital constraints. The combination of these factors causes investors to sell the currency, the rupee, which in turn stokes fears of inflation. If the currency weakens, buying power is reduced and businesses are forced to raise prices. And the pièce de résistance in these situations is a declining stock market. So on top of everything else, investors now feel poorer by the day, which certainly doesn’t help the original problem of slowing growth.
Does this story sound familiar? Sure. The U.S. and Europe both experienced some of these economic challenges but it looks like both are on their way to recovery. India’s government will need to take aggressive steps to restore confidence and suspend this economic free fall.
August 9th, 2013 by Reuben Advani
Two big stories surfaced recently. One was about a famous athlete whose career hangs in the balance due to his alleged use of performance enhancing drugs (PEDs). The other stemmed from speculation over when the Fed would end its program known as quantitative easing (QE). Two entirely different stories found themselves front page and center. But were they that different? In a way, these two stories have more in common than we might think.
A few months ago, I wrote a short article on quantitative easing. To recap, QE was a program started by the Fed to purchase bonds in an effort to push interest rates lower and increase the money supply. By purchasing these bonds, the Fed pushed bond prices higher. When bond prices move higher, their yield moves lower. In other words, the interest paid on these bonds is a smaller percentage of the bond’’s now higher price. Yield is an important concept because it impacts the interest rates in lending transactions. Lower yield means lower finance costs for you, me, and the rest of the borrowing world. When we borrow cheaply, we spend more which helps the economy to grow.
So what does this have to do with PEDs? Our economy has relied on QE for several years which many believe functions as an economic PED. And on the surface, it seems to have worked. The big problem is that PEDs have side effects. And an even bigger problem is that PEDs enhance performance while they are being used. What happens when their use is halted?
August 1st, 2013 by Reuben Advani
The big news this week was Facebook’s remarkable ascent back to its IPO price. It’s about time. For more than a year, the privileged few who were awarded shares in the IPO have waited anxiously for this move. What many of us are wondering, however, is whether the IPO price was fair and if the drop post IPO was the result of irrational expectations.
Investors lined up for Facebook shares in May of 2012 knowing that it was a speculative play. When it failed to meet these expectations, the shares sank. In other words, investors expected too much, too soon. Today, Facebook seems to be delivering on some of the promises it made more than a year ago. Specifically, their mobile advertising sales were impressive to say the least. Last year, Facebook’s management stated that mobile advertising would eventually become a primary engine of growth.
Based on recent developments, the IPO price appears fair. After all, it was built on long term growth. Facebook will be a growth play for years to come. And with high growth comes high risk. And with high risk comes price volatility. Fasten your seatbelts as the Facebook roller coaster ride is just beginning.
July 24th, 2013 by Reuben Advani
Apple just announced it’s quarterly earnings this week and they were slightly better than expected. That was enough to push the stock price higher by about four percent in after hours trading. Unfortunately, Apple’s revenue guidance was a bit lower than expected which prevented a more significant stock price move. Nowadays, investors would all but trade strong earnings for revenue growth. In other words, investors would forgo earnings today for stronger revenues tomorrow. It seems a bit odd but there is some logic behind it.
Revenues are often the most difficult line items to control. A company can boost its earnings through cost controls and even changes in accounting assumptions but strong and sustainable revenue growth is a different story. Consider this: company A has earnings of $1000 and revenues of $5000. Company B has earnings of $200 and revenues of $8000. More importantly, company A’s revenues will remain flat next year while company B’s revenues are expected to grow by 20 percent. Which company would you rather own? Believe it or not, many would prefer company B even though it earns less. Strong revenues and strong revenue growth are hard to come by. They are key drivers of valuation. Earnings are important but not as important as they used to be. Moreover, a company with solid earnings but flat revenue growth will struggle to improve earnings. On the other hand, a company with weaker earnings but strong revenue growth can always initiate cost cuts to boost earnings.
Keep in mind that these rules are by no means written in stone, as no two businesses are alike. The investor preference, however, tends to be for companies with strong top line growth.