Section II: Leading companies
The following articles describe
some of the companies representing the individual sector. The best way to
understand and learn from the recent updates on sectors is from subscriptions
such as Finviz, Value Line and many web sites that specialize in sectors.
Use my logic in selecting stock
and sector, not the information that may be obsolete by the time you read these
articles.
When the leader of an industry
moves, normally all the related companies move in the same direction. To
illustrate that, when Apple moves, most its suppliers usually move in the same
direction. There are many stocks (most from Taiwan) that surge when Apple needs
new components from them. Many sectors such as Basic Materials depends on
China, so refer to my “Strategy: China” at the same time.
# Filler: My favorite store
The new name of the merged companies “Family Dollar” and
“Dollar Store” would be "General Family Dollar" or "Two Dollars
Now”.
#Filler: Irrefutable logic
Boston protesters (turned out to
be all white) learned from takeovers and this time on a highway. They must be one
or all of the following: 1. Welfare recipients (have nothing better to do), 2.
Students (either with loans or supported by their rich parents) or 3. Mentally
challenged (could be too many drugs or drinks from their parents).
The arguments are quite stupid. They say the white (no Asians, no Hispanics and no blacks) are using the highway to go to work. If they do not go to work, how can they support you? Stupid folks do stupid things with stupid arguments.
The arguments are quite stupid. They say the white (no Asians, no Hispanics and no blacks) are using the highway to go to work. If they do not go to work, how can they support you? Stupid folks do stupid things with stupid arguments.
9 Bank of America
Some dividend investors still
praise how great BAC (Bank of America) is. This stock did come back great for
the year of 2012. When you have fewer banks, you have a better market share and
better opportunities to make money.
For the last five years starting from 2007, BAC has been falling from about $50 to $8. The total dividends added will not offset the big loss. In Dec. 2007, BAC paid about 5% dividend with a price of around $45. It would be loved by dividend investors back then, but not anymore after they found out how much their stock had immensely depreciated.
Their argument for the total dividends is from the IPO day and even with today’s depressed stock price it could have doubled their initial investment. This argument has too many flaws including the following:
For the last five years starting from 2007, BAC has been falling from about $50 to $8. The total dividends added will not offset the big loss. In Dec. 2007, BAC paid about 5% dividend with a price of around $45. It would be loved by dividend investors back then, but not anymore after they found out how much their stock had immensely depreciated.
Their argument for the total dividends is from the IPO day and even with today’s depressed stock price it could have doubled their initial investment. This argument has too many flaws including the following:
1. The
performance should be adjusted for inflation.
2. If
I bought Apple at its IPO, I could be thousands of times richer than owning
BAC. You just cannot draw a conclusion on a strategy from a specific stock when
using a period favorable to your arguments.
When we evaluate a stock, we should skip
some sectors or do not use our conventional way to score a stock
such as with the banking sector. The quality of the mortgages requires more
expertise than using the common fundamental metrics.
In addition, we should avoid our biases such as blindly loving
a strategy (dividend strategy in this case). Most strategies will fail
eventually when the strategy is over-used. Do you remember buying internet
stocks before 2000?
#Filler: Bad management and good research
Apple and Microsoft copied a lot
from Xerox's PARC including Windows and mouse without paying any royalties.
Xerox should have been split into two parts: bad management and good research.
10 Caterpillar
This is my analysis of Caterpillar in May, 2012. You may
need to hold CAT longer, like two years (after 2014) when the economy would
start to recover. Even with the present metrics, it looks great. As of 5/12,
the mining and construction businesses are slowing down but they will come back
eventually.
On 5/7/12, it scored at 24, from my scoring system which indicates a buy for any score over 15. However, the short-term outlook of the market does not look good.
Value Line indicated an annualized 16% return after 3 years (8% is good for me). Fidelity has 9.5 out of 10 from a summary of analysts. 17% of its stock price is cash. It is 98% cheaper compared to its 5-year average P/E. In a word, it was priced below its value in 5/2012.
The only negative point besides the global economy is its high debt / market capital though it is quite normal within its industry. It wrote off a Chinese company that it acquired due to some fraudulent financial data. The management has to bear some of the blame. Well, if a big company with its immense resources cannot detect the fraud, how can we, the retail investors, detect such fraud?
On that day of the analysis, the stock price was 97.19 and today it is 79.14. I bought it two times in between these prices. Is it a gem or will it fall further? Only time will tell.
On 5/7/12, it scored at 24, from my scoring system which indicates a buy for any score over 15. However, the short-term outlook of the market does not look good.
Value Line indicated an annualized 16% return after 3 years (8% is good for me). Fidelity has 9.5 out of 10 from a summary of analysts. 17% of its stock price is cash. It is 98% cheaper compared to its 5-year average P/E. In a word, it was priced below its value in 5/2012.
The only negative point besides the global economy is its high debt / market capital though it is quite normal within its industry. It wrote off a Chinese company that it acquired due to some fraudulent financial data. The management has to bear some of the blame. Well, if a big company with its immense resources cannot detect the fraud, how can we, the retail investors, detect such fraud?
On that day of the analysis, the stock price was 97.19 and today it is 79.14. I bought it two times in between these prices. Is it a gem or will it fall further? Only time will tell.
Afterthoughts
·
As of 9/2012, CAT had appreciated by 10% from
7/2012. Together with Cisco, they’re supposed to be ‘Buy (bargains) and Forget
(until the economy returns)’ stocks. The good news on China’s stimulus plan
makes the stock rise. I would forget this stock for 3 years. In the meantime,
the immediate prospect is not good for CAT with the decreasing of most global
infrastructure projects and mining projects.
·
Buy CAT for the dividend according to this SA article.
11 Apple
Contrarian
I have been a contrarian
several times and most of the times I have made some good money. We need to
have good arguments to be contrary. Otherwise, we’re committing financial
suicide.
Many investors commit
the same error: Invest in a company because they love the company’s products.
We need to check out the fundamentals of the company and its prospect. I have
nothing against Apple. Actually I recommended Apple before based on its great
fundamentals when many institutional investors were dumping it.
Scoring Apple
When I was writing the
book Scoring
Stocks, first I used IBM but its low score would not be a good
example. Then I switched to Apple (AAPL). It scored almost the highest. I
recommended AAPL at $55.72 (split adjusted) on April 19, 2013, the date in
which the book mentioned was published. It is another example why that
fundamentals work. However, when we’re swimming against the tide, we need to be
patient. At that time, the media and institutional investors ignored the
fundamentals. The best argument of not buying Apple was “Apple has turned from
a growth stock to a value stock”. They think they cannot get fired by thinking
the same as the herd; it was just garbage talk from some of the smartest folks!
Fundamental analysis as of 02/23/2015
|
Passing grade
|
AAPL
|
Industry
|
||
|
Score System
#1
|
>=15
|
16
|
||
|
Score System
#2
|
>=2
|
2
|
||
|
Pow EY
|
>=5
|
6%
|
||
|
Expected Earning Yield
|
>5
& <35
|
7%
|
5%
|
|
|
Debt / Equity
|
<.5
|
.30
|
.29
|
|
|
Analyst Rating
|
>7
|
9
|
||
|
EB/EBIT
|
>5
|
13
|
||
|
F-Score
|
>7
|
6
|
||
|
ROE
|
>=15%
|
37%
|
27%
|
|
|
SMA-200%
|
>0%
|
29%
|
||
|
RSI(14)
|
<60
|
78
|
||
|
Price
|
$132.06
|
Explanation
·
The first scoring
system incorporates many vendors’ grades. The second scoring system is from my
book Scoring Stocks using metrics available free from many web sites.
·
Expected EY,
Debt/Equity, ROE, SMA-200% and RSI(14) are obtained from Finviz.com.
·
Analyst Rating (now
it is Equity Summary Score) is from Fidelity. Alternatively, use Recommendation
from Finviz.com.
·
EB/EBIT and F-Score are
from GuruFocus.com.
How Apple scores
It scores fine but not
spectacular. The score from my book on April, 2013 is 5 and as of this writing
it is 2. Fundamentally it is not as good as before.
P/B and P/S are usually not
useful for high tech companies. However, Apple’s P/B at 6 is exceedingly
expensive as compared to Google’s 3. When most analysts like the stock, usually
it will rise in the short-term. RSI(14) shows it is overbought. To conclude,
its fundamental score passes but not by flying colors.
The
brief Fundamental Analysis should be followed by:
Qualitative
Analysis includes articles for Apple. First, search articles on Apple from Finviz.com
and Seeking Alpha.com. Large companies like Apple are hard to manipulate, so
most articles are not ‘pump and dump’.
Technical
Analysis detects the trend and overbought condition. Many investors do not buy
a stock that is in its downward trend. SMA-200 is a good long-term trend
indicator. Its price should be above the SMA-200 (same as SMA-200% is positive
in Finviz.com).
Intangible Analysis
Apple has lost a visionary leader
Steve Jobs. I hope he was not replaced by similar managers at Microsoft, who
are responsible for Microsoft's lost decade with few innovative products. Apple
has a lot of cash to finance new projects. High tech business is tough as they
need to build a better mouse trap continuously. When the mouse trap becomes a
commodity, the profit margin would be reduced. This is the major reason that
Buffett does not invest in Apple. If he read my book in May, 2013, he would buy
Apple instead of IBM saving his company millions minus $10 for my book. LOL.
There are bright and bad spots for Apple:
1. Apple
Text Book. Imagine all students carrying iPads instead of text books. Several
educational apps have been created for iPads. The competition is laptops and
Chrome Book.
2. Apple
TV.
It is a loser so far with a lot of risk and potential
competitors. However, the potential is great. It could give all cable companies
a run for their money. Wider internet channels would make it more feasible. Will
the cable companies provide these speeds to allow Apple TV and similar products
to step onto their turfs?
3. While
the iPad and iPhone are peaking in the hardware, iTunes, software and the contents
for these devices to access have no limit. We have witnessed how iPad helps the
folks with autism and iPhones for the blind. I can envision many other similar
applications.
4. Will
Apple move into Kindle's market? It may be too late and too little.
5. All
the mobile phone technology was originated by the first generation (if not
counting Motorola)
as Apple has a lot of patents. Its lawyers will milk money from Samsung. It
also prevents cheap mobile phones from coming to the USA. The U.S. helps Apple
by not letting Huawei’s phones in.
6. Apple
Pay.
Apple has a
proven history of picking up some failed products and turning them into gold. This
product could be the next innovative and most profitable for Apple. Apple Pay
will not make a splash in the bottom line initially.
7. Apple
Watch.
There will be cheap Chinese products flooded into our
market. However, the selling point is the prestige of Apple and its integration
to other Apple products. The major problem of the Apple Watch is the short
battery life. With the reduced urge of upgrade and competition on Apple phones,
the Apple Watch is an amazing product for Apple.
8. The
major worry is whether they can maintain the urge of upgrade. If the new
enhancements would not give me reason to upgrade, I would not be the one
waiting in a long line in bitter cold weather to upgrade my iPhone just to
satisfy my dumb ego. It accounts for the majority of Apple’s profit.
9. Apple
has a lot of cash. Dividends usually boost the stock price and the option
values granted to the management. However, it is important to plow back to
development and acquiring technologies.
10. U.S.
stops Huawei and Xiaomi from coming to the U.S. Apple is not the
state-of-the-art phone. Xiaomi’s phones are too close to Apple’s user interface
and they would be challenged by teams of Apple’s lawyers. China would take
counter action on Apple phones being sold in China. The trade war could lead to
a lot of problems for Apple.
#Filler: iGeneration
Almost everyone has an iPhone. Folks including myself
in the lower class of the society carry imitators and/or those 'outdated'
iPhones that are several months old.
My grandchild of just over one year old had a good time playing with the iPad and it usually kept her busy for hours. Before she could say Mom, she said “I” for iPad. During my family gatherings, my cousins communicate with each other via their smart phones even when they sit next to each other. When they do not text messages, they play games with their smart phones.
Even with one pair of eyes and one pair of ears, they can play iPad, listen to iPod and text using iPhone at the same time. Thanks Apple for demonstrating what multi-tasking really is. I prefer to do one task correctly rather than several tasks incorrectly. Chinese and Indian students are leaving us further behind by spending more time in study. Do you believe those children spending an extra 2 hours every day in games would accomplish the same later in life?
My grandchild of just over one year old had a good time playing with the iPad and it usually kept her busy for hours. Before she could say Mom, she said “I” for iPad. During my family gatherings, my cousins communicate with each other via their smart phones even when they sit next to each other. When they do not text messages, they play games with their smart phones.
Even with one pair of eyes and one pair of ears, they can play iPad, listen to iPod and text using iPhone at the same time. Thanks Apple for demonstrating what multi-tasking really is. I prefer to do one task correctly rather than several tasks incorrectly. Chinese and Indian students are leaving us further behind by spending more time in study. Do you believe those children spending an extra 2 hours every day in games would accomplish the same later in life?
Some parents have a hard time trying to explain to
their children that their existence was due to the blackout of the iPad and
iPhone caused by the recent hurricane.
12 Cisco and Huawei
Will the folks at Huawei pass information onto the Chinese government on sensitive data from their routers? They're all unfounded accusations to fight their competition.
If the
secrets can be stolen that easily, we have to blame Cisco for not protecting
their secrets and we would have many companies like Huawei. Cisco is using this
to protect its bidding from Huawei unfairly. This tactic works successfully in
the U.S., but not outside the U.S. It is a case of its sales force in the U.S. that
does not care about the sales force in China.
If there is a trap door to steal data from the network, a good percentage (about 20%) of the global traffic has been routed via the Chinese equipment already.
It is a fact
that companies and even countries spy against each other. If you believe
CIA (same for NSA) is just gathering information, you believe in fairy tales or
your dumb nationalism blinds your eyes.
How can Huawei steal our 5G network when
we do not have full 4G network? Cisco has missed the opportunity to buy ALU
when ALU was $1 per share. I did and sold it shortly with a 40% gain when Cisco
did not show an interest in acquiring ALU.
Many devices will be connected to the web. Cisco, Huawei and companies in this sector will all benefit. Singapore today provides a glimpse into the future. Every street has surveillance cameras which are connected to the internet via routers.
Many devices will be connected to the web. Cisco, Huawei and companies in this sector will all benefit. Singapore today provides a glimpse into the future. Every street has surveillance cameras which are connected to the internet via routers.
I expect
Cisco's stock price will fluctuate with today's range (as of 5-2013) and it
will take off after two or three years hopefully when the global economy
recovers. Huawei will be in better position in the long term as their research
and manufacturing costs are far lower than the U.S. and it doubles the size of Cisco. Huawei's products are very competitive and already
have captured a good market share outside the U.S. The margin of the industry
will still be favorable. As of 2020, Huawei would face a lot of problems
from the U.S. ban.
13 Tesla
Is TSLA a good investment?
From the fundamental metrics, it
is not. As of this writing the expected P/E is 150 and ROE is -360%. I seldom
invest on stocks with P/E over 40. However, the outlook of the company is very
rosy and the rising stock price indicates it could revolutionize the auto
industry.
My preference is “Buy low and
sell high” as opposed to the current stock holders’ “Buy high and sell higher”.
Common mistakes of retail investors:
1. Investing
in a company is different from investing in a company’s products. Many Tesla
owners own the company’s stock.
2. Potential
appreciation of a stock has nothing to do with its past performance. Will it have
another 300% return? Most likely, it will not. If there is even chance that the
share price to decrease by $100 and increase by $50, I do not buy the stock.
3. When
the trend (all three simple moving averages from Finviz.com indicates the trend
is up), selling short is against you even if you have good argument. Do not
swim against the tide especially in short term trades.
4. Your
profession (or expertise) could bring you a bias in making investment decisions
in a company. I had many high tech friends betting on internet stocks as they
‘knew’ better. It is hard to convince lottery winners not to buy lottery
tickets.
The Business Model
Building super charge stations
for the current owners to use free after a small initiation fee is a reversed
business model of giving razors free but making money on the blade. The latter
proves it works, but there are not too many beneficial precedents for the
former model.
Tesla, the car
Tesla is an electric car. As of
this writing the current model is about $80,000 (not a typo) and the new model
will be about half of that. The problems are:
1. The
service stations are built for free charging after an initial fee. Are they
really free? It will be great for the
owners if the company will not be bankrupt from its shaky financial state. The
same for sending mechanics to your house to fix your car. I hope they too will
prosper as I cheer them on from my cheap seat.
2. The
charging range for the average owner is far worse than the range under ideal
conditions and it will never be close to the range of cars using gas. Is the
extra cost for larger batteries worth it to an average driver?
3. The
other problem is that some states do not (or will not) allow selling a car
there without a dealership. It is costly to build a dealership network.
4. My
estimate is $10,000 rebate per car sold by Tesla from the government. Will the
government subsidize them forever? It is not a big deal now as the number of
cars they are selling is still small.
5. It
will appeal to folks driving a lot of miles in a year and/or when the gas price
surges. I drive about 8,000 miles a year and it will never pay me back for the
extra cost ($80,000 vs. $23,000 for my Honda CR-V). Hope the $40,000 Tesla
would make a big difference.
6. Even
if the company is making easy money in selling the carbon credit, it
will still have big losses in the coming years.
The link is http://en.wikipedia.org/wiki/Carbon_credit.
Musk
Musk is very brilliant in pumping
up the stock. He will sell it without the restrictions in the loan after he
paid it back to DOE. The last owners of this stock could be the biggest losers
if it heads south. I could be wrong with the timing but not wrong in the
fundamentals of the company.
As of 2020, the bad news is
decoupling with China. Tesla has a lot of investment in China. The good news is
technology is making electric cars more affordable and feasible.
14 Holes in retailing
Amazon has changed retailing
forever and the pandemic of 2020 makes it worse. Many retailers have more holes
in their operations than Swiss cheese:
·
The bankrupt Circuit City ‘pioneered’ returning
merchandise with no question asked. Buy the most expensive TV before the Super
Bowl and return it after. You will always have the top-of-the-line TV for big games
to impress your friends. In addition, you can buy them back at a discount as a
returned item.
·
When an item is on sale, you cannot get the
credit of the difference of the price you paid and the current sales price
within a specific number of days. However, you can return it for a full refund
and buy the same item at the sale price.
·
Sears once
was the biggest retailer.
Eventually they could only sell lawn
mowers and appliances in order to survive. There are so many wrong decisions
that I do not know where to begin. Selling clothes of Salvation Army quality at
bargain prices in expensive malls is the same as committing suicide slowly plus
ruining the image of the company.
At one time, Sears split itself
into multiple stores such as one for eye glasses and one for tax returns within
the same location. It had been proven it did not work. The most amazing thing
is the x-president of JC Penny followed the same idea. It is the same of
stepping on the trap that has an obvious sign. The blind following the
blind is silly; a blind following something that has been proven to not work is
ultra-stupid.
With the pandemic of 2020, many
retailers suffer and many have bankrupt.
15 Solar industry
I
have a lot of doubts about this industry. Here is my negative outlook on this
industry:
1. They cannot compete with Chinese companies if the protectionism is lifted. Some
companies in Europe produce better products. Hence, they depend on local sales
and tax rebates.
2. Solar is still expensive if oil is below $50 in most regions of
the USA.
3. Shale oil and gas could make solar impractical in most areas of
the USA. They need to solve the environmental problem and set up the pipelines.
4.
How many previous
losers (there is a lot) on this stock will return? More importantly, how many
investors find its potential appreciation attractive?
5.
Many companies in
this sector are losing money now and some have been bankrupted.
6.
However, technology
would make it very profitable and it is renewable.
#Filler: Metric system
The USA never wants to adopt the metric
system. It is mainly due to our love of the football game which uses yards. 0.9
meter does not sound right, does it?
At one time, when two identical missiles were
fired between here and Russia, the Russian missile would arrive here earlier
due to no extra calculations to convert to metric values. This is not true now
as the CPU is super-fast today.
An
aging population and technology advances are the major factors affecting the
stock market and specific sectors in the coming decades. These sectors may not
rise or fall in a straight line.
The
aging population is due to the baby boom after WW2. It is happening now. It
gives rise to health care and medicines tailoring to the growing need.
If
the seniors start to withdraw their savings, then the market would tank.
However, the market has been rising for the last 10 years and the drug
companies were not doing well in 2018. The population is rising but in
developing countries such as in Africa and India where the GDP is low.
Technology
such as robots and artificial intelligence will make many jobs obsolete. The internet would make newspapers obsolete
as the readers can find articles for free. If they do not adapt, they will
perish. So are brick-and-mortar retailers to some extent. Most big chains have
on-line stores. Mobile pay would replace credit cards. When more electric cars
are manufactured, the gasoline price would be reduced and many gasoline
stations will have battery chargers.
5G
technology would make some sectors prosper while some would become obsolete.
Driver-less cars would be one that benefit. After 2030, China will be the main
force in the global economy. It has been slowed down by the trade war as of
2019.
There
are some predictions that the U.S. will suffer a lot in 2020. Even they have
good arguments, I am not totally convinced. However, I would take actions,
similar to buying insurance. I would like to invest in gold and foreign
countries. China has a cycle of disasters every 60 years and 2020 is supposed
to be similar to the great famine of 60 years ago.
31 Tough restaurant business
They may be one or two out of 10
restaurants that are doing fine. Try to avoid buying stocks in this business.
Retail and Restaurant are just
tough businesses. Red Lobster
did not do well.
I attended a banquet in a top
hotel in Boston. The steak was so tough that I could not chew (old age was one
reason too). I do not know why the hotel wanted to risk its reputation by saving
a few dollars per plate. If you need to save the few dollars, please grind the
meat. Yes, there will be no return customers, but this is the reputation you’re
risking.
32 Using TA on sectors
There are 3 uses of TA for sector rotation.
1. Detect
sector plunge and when to reenter the market after plunges.
2. Regular
use (usually after its recovery from a plunge).
3. Detect
market plunges and/or sector plunges.
#3 has been described on the
chapter Spotting Market Plunges and it will not be repeated here.
The difference in #1 and #2 is in
the number of days in SMA (Single Moving Average). Use 350 for sector plunge
and reentry.
Use 30, 60, 90 or 120 for regular
use (i.e. after the reentry from a market plunge) depending on how frequently
you rotate. If you rotate in 60 days, use 60 for the average of number of days.
Exit / Reenter a
sector ETF
To illustrate, the following
example uses XHB (an ETF for the housing sector). Use the same chart for other
sector ETFs such as VGK for Europe.
Produce the following chart by
using Yahoo!Finance. Enter XHB and select Interactive Chart. Select SMA and
then 350 days. Select Max for ‘From’.
Source:
Yahoo!Finance. XHB on 350 SMA.
·
Exit when the price falls below the red,
single-moving average (the SMA) and enter when it is over the SMA. All the
dates and prices are approximate and for illustration only.
·
I use Max for the period. Let’s assume the chart
instructed us to exit at $45 around 2006 and reenter on August, 2009 missing a
loss of about $30 per share. Not too bad!
·
There are brief exits and reentries before 2012.
I call it noises. The gains and losses are negligible. However, make sure you
exit and also reenter. If you use 60 days instead of 350 days in this example,
you have more noises. If you trade the ETF more often, then you use 60 or 90
days. It depends on your risk tolerance and your time to trade. Sometimes the
performance makes a difference in selecting shorter days, but not all the time.
·
From the end of 2012 to today (10-2013), it
gains more than 40% compared to -32% for the period for buy-and-hold. A difference of 62%! Even a difference of 10%
would be great.
·
The chart works at least for this period. It is every one’s guess whether it will still
work in the future. I bet it will but as in life nothing is guaranteed.
·
When a housing stock, the housing sector (XHB)
and the general stock market all above their respective SMAs, the stock most
likely will appreciate (again nothing is guaranteed).
·
From my other chapters, the offending sector
(housing and finance for 2007 market plunge) takes about two years to recover
from the bottom.
I interpreted the bottom was 10-2007,
so the recovery would start in 10-2009. If you bought XHB in 10-2009, you would
have gained about 100% today (10-22-2013).
·
Some sectors never recover such as the internet
and some high tech companies in 2000.
Now, it
is your turn to try out the chart. This time, use 60 for the number of days in
SMA.
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