Bullworthy Market Update: February 27th, 2010

Bullworthy is bringing to you easy-to-follow and understand financial market news, commentary, and analysis. This week: President Obama and big banks; Greece and sovereign debt troubles; Toyota woes create opportunity for US auto makers; why I don’t (and you shouldn’t either) bother tying to be a day-trader.

Current Bullworthy Stock Portfolio Snapshot

 I’ve been asked for a list of my current stock holdings and I’m happy to post them for all first-time investors to see. I’ll even take it one step further – I’ve also posted my number one (although certainly not only) reason why I’m holding that particular stock. Sure, I expect them the price to go up – but here I’ll answer the question of why I expect that upside.

 A-Power Energy Generation Systems (APWR) – APWR is a Chinese company that provides power grids to metropolitan areas and is the world’s largest producer (by size of contract) of wind turbine systems. Certainly clean energy is the future, and APWR seems to be landing contracts left and right since it broke into the wind market only 2 years ago. And even if I’m wrong, well, China is a big country – there are a lot of rural areas that will always need electricity, their core business.

 Activision Blizzard (ATVI) – The video software engineers and owners of the widely popular World of Warcraft franchise is boosting earnings, sales, and cash flow year in and year out. The company did report a loss last month for the fourth quarter of 2009, but analysts forecast positive earnings growth for the next few years. The reason is thanks to market share. ATVI produces most of the last few years’ most popular games that came out of America (the Guitar Hero franchise is among its biggest hits). The company is also headed up by Robert Kotick, a legendary video game entrepreneur and business man.

 CEVA, Inc. (CEVA) – This semiconductor technology company designs and licenses many of the components and software that makes everyday devices hum (think Bluetooth, mobile TV’s, MP3/MP4 players, etc.). CEVA offers my portfolio the unique opportunity to add the potential upside to technological advances, popularity, and sales; but also minimizing the risk that traditional merchandising companies experience including sluggish sales or changing tastes in particular technology products among consumers.

 Harry Winston Diamond (HWD) – The diamond miner and jeweler has experienced a sizable appreciation in its price since I first bought in, I’m assuming thanks to improved corporate earnings and improved commodity markets. Buying into a commodity-producing company puts a new twist on your portfolio – that is, you’re now susceptible to improvements or declines in whatever commodity market your company participates in. With HWD, we gain during improvements and suffer during declines in the diamond markets. It’s true that the recession crushed the jewelling industry (who the hell was thinking of buying a diamond ring between 2008-2009?!), the appreciation in gold during the 2009 stock market rally lifted most other precious metals with it. As uncertainties in the global economic continue, investors find a safe haven in commodities.

 IMAX Corporation (IMAX) – I love this company, and I’m grossly overweight in their stocks (overweight works against diversification – I have proportionately more shares of IMAX than I should…if the stock price drops, my whole portfolio will suffer tremendously) but I’m confident. I started acquiring IMAX last year before “Avatar” came out and crushed box-office records, creating a large margin and (we’re all assuming) subsequently large fortune for IMAX. Secondly, this company has so much room to grow. They have a ton of cash, little debt, and they’ve already positioned themselves to dominate a market that I believe will become ubiquitous with the average American in the coming years: 3-D television. It’s already here; it’s just too expensive to mass produce. But when IMAX figures it out, IMAX could be the Google of interactive TV.

 Free Seas, Inc. (FREE) – I bought Free Seas last year at the bottom of the economic slump, around March of 2009. FREE is an international maritime shipping vessel operator. Basically, they lease out giant boat to companies who want to ship goods overseas. The shipping industry was hit particularly hard in the recession as countries produced, sold, and shipped fewer goods. So I figured an economic turnaround was bound to happen, and so was the return of shipping. I was sort-of right; although the company’s stock price has lost me about 22% since I bought it, the company itself has done well over the year and continues to buy new ships. I’m a holder.

 Converted Organics (COIN) – COIN is your typical “green” company – environmentally conscious businesses that we all hope will do well, and likely will over the long run, but are for now failing miserably to turn a profit. COIN manufactures organic fertilizer and soil from food waste. They have a promising business model – they charge garbage companies and restaurants to take in food waste (first revenue stream), convert it in to fertilizer, and sell it as an organic product (second stream of revenue) to large retailers like Wal-Mart and Home Depot. They are struggling to pay down debt caused by poorly-planned facility and business expansion by management last year. I’m holding for the long-run anyway – if they don’t go bankrupt in the process.

 BMB Munai, Inc. (BMB) – BMB is a Kazakhstani company that engages in oil and gas exploration, drilling, and production in one of the most undeveloped markets in the world. Research has shown that there is definitely oil in the area KAZ operates in; however, that research was conducted by KAZ. I’m a little skeptical, so the amount of cash I first put in KAZ was very small in comparison to my other holding, and I never added any more after that. I could lose it all and wouldn’t be fret it, so I’m holding this stock for that reason alone.

 People’s Education Holdings (PEDH) – My stake in PEDH and the reasons behind my buying this stock serves as a classic example of what NOT to do when you’re investing. Here’s why: I was watching PEDH when it popped and gained nearly 50% in one day, for no apparent reason. I waited for the deflation (anytime a stock jumps way up like that, you can usually bet that within a few hours or days, it should lose some of those gains). The deflation hadn’t come within a few days, so I bought, and I bought big. PEDH publishes and supplies educational textbooks and supplemental tutoring products to classrooms and students for all grades up through college. I knew that President Obama was a big supporter of educational spending, and that a few billion government dollars had been earmarked in this year’s budget for preparatory materials to be used in schools. PEDH would directly benefit from that spending! I should have done some research, not just jumped in with the rest of the crowd. My investment in PEDH has plummeted, but I’m a holder because PEDH is a solid company. The reason for the drop after the pop: I wish I knew.

 -Tom Copeland, tom@bullworthy.com

A guide to stock turmoil for the first-time investor

So you’re interested in buying some stocks, and I’m happy to help. Whether you’re buying stocks low and then selling them high for quick profits, or you’re in it for the long run – a strategy loosely known as “buy and hold” – you’re bound to feel the burn of a stock price drop at some point. Stock prices move up and down every day, and you cannot control or manipulate them to your advantage. Price fluctuations and exposure to loss is certainly not exclusive to first-time investors or the inexperienced – top money managers lose cash with bad investments and downward price movements too. In fact, the only man in the history of finance to ever not lose client money in stocks and other financial products: Bernard Madoff, because he wasn’t actually investing it – he was simply stealing it (click here for more info on ponzi schemes and hot to avoid them).

So you’ll just need to accept the fact that you won’t always be right. But if you take the time to study, understand, and respect stock markets and their powerful abilities to give and take money, you’ll do just fine in the long run. The goal is not to be right every time – just be right more often than not. And the likelihood that you will achieve success in the stock market over the next 30-40 years (or however long you have until retirement) is almost guaranteed. You only need to look at the history of stock markets: consider that, at one point, the Dow Jones Industrial Average was worth only 1 point. Today, the DOW sits at 10,200 points.

Here’s a few lesson you should follow as a first-time investor when you have a company in mind that you want to buy, but aren’t sure if you should. After all, no one wants to lose money.

   First lesson: know your company. This is a simple concept that is not always followed by first-time investors. A lot of investors and traders (people who buy and sell stocks everyday for a living) use strategies that do not consider “knowing your company” to be very important. But if you’re considering buying a company, consider this: wouldn’t it be easier to understand what’s going on in a company’s market, their industry, or with their competitors than one you don’t know? Here’s an example. You’ve heard Microsoft is a great stock to buy, but you don’t know anything about technology or software. You know nothing of the company, who they are, or what they do – much less about Oracle Corp. or Apple Inc, their major competitors. You see their stock price – $28 a share – but you don’t know if that overprices, underpriced, or the right price. But you do know about retailing because you’re a manager in a clothing store. Maybe you already own stock in the company you work for because it was given to you, which is great. But it is the best retail stock to own? There are 5000 other retail industry company stocks in the markets to choose from – where do you start? Knowing your company is important in the event that the stock price plummet’s  because you’ll know if it’s worth holding or not. Consider that during the market crash of 2008, companies lost 40-80% of their stock value, and I mean almost ALL companies. Maybe financial stocks we’re deserving of their devaluation, but what about movie theatre stocks? Movie theatre stocks posted enormous profits because as investors saw last year, in a recession, people don’t stop going to see movies. It’s all about valuation.

   Second lesson: put a value on your company.  Attaching a value to the company whose stock you’re thinking of buying isn’t easy, and there isn’t one way of doing it. In fact, there are hundreds of different ratios, facts, figures, statistics, quarterly and annual financial reports and accounting practices that creditors and professional investors use to get very specific in their valuations. But as a first-time investor, you needn’t any of that confusion – keep it simple.

(The following valuations can be found easily on yahoofinance.com – keep an eye out for a video I’ll post that will accompany this post showing you how to find these figures for any company you’re considering buying).

For all these valuations, you’ll need to determine whether they are in an uptrend, a downtrend, or neutral. Click on the link to see an example of a company who demonstrates desirable uptrends/downtrends for each value.

Income – Find out how much income your company is pulling in. Find out what the revenues are (money before expenses). And while you’re at it, consider their expenses too. It’s found on the income statement of any company, and you’ll want to see an uptrend in revenues and a downtrend or neutrality of expenses.

Debt- Is your company swimming in debt? Forget the stock. Long-term debt is essential to a company’s growth, as long as assets outweigh the debt. Short-term debt, however, pilling up way beyond assets could be a red flag, especially if it’s been getting worse over the last few quarters. Look for an uptrend in assets, a downtrend in debt, or neutrality in debt.

Earnings – look for an uptrend in earnings over the last few quarters and the last few years. Neutrality is OK, but don’t necessarily expect a jump in the stock price based on shareholder equity (earnings) if the company isn’t growing in that regard.

That’s a solid start in determining the value of the company you’re thinking of buying. But it doesn’t stop there – even if your company has satisfied all these conditions, there’s still much more to consider. Contact us for more information on how to value a company beyond these three simple figures.

    Third lesson: don’t panic! You’ve done your homework. You’ve followed our recommendations every step of the way (or maybe you didn’t and still ended up with a great companies stock). Congratulations! But the stock price just dropped, and so did your stomach. You’ve watched your stock lose 5, 10, or maybe even 20% of what you paid for over the course of 5 days. Your mind is racing and your heart is pounding; when will it end? Could it drop more?

Again (unfortunately) there is no single answer. But here’s a start: don’t panic. Not all stock drops are deserved! Remember, stock prices drop because investors who hold the stock are selling them in large volumes. Sometimes, a stock can get “oversold” on hype or news. But here’s an important point: know how valued your company is – not just by your expectations, but by the market’s expectations, too. Will the stock price come back up? In the long-run, certainly (with a few historical exceptions such as the fall of GM due to overwhelming debt and a gradual loss of American car-maker market share, or the fall of Lehman Brothers due to extreme financial risk-taking). You’ll find yourself asking, “But what about now? Will the stock price come back or should I sell and cut my losses”? In most cases, cutting your losses is a bad idea. Once you actually sell your stock, the loss is permanent – as opposed to just holding a losing stock, which could come back eventually. Consider the 6-month stock market free-fall between September 2008 and March of 2009. Investors who sold their stocks after 5 long painful months of seemingly never-ending losses at the market’s bottom in March 2009 made their losses permanent. But March 2009 to November 2009 saw the world’s largest and most aggressive bull rally – stocks as an average gained between 40-50% in less than a year! In fact, a quick look at a chart of the DOW reveals a few interesting things – including the fact that if you got into the stock market in 2000 and stayed until today, you would have actually just went up, down, up, down, and then even. You would have lost only -1% over ten years!

So be a diligent and committed first-time investor and follow these tips. And of course, contact me with questions, comments, or concerns!

-Tom, Bullworthy.com.

tom@bullworthy.com