Our Financial Uproar Stock Picks

January 6, 2012

See cube, eat cube

 

One of the few personal finance bloggers who remains on speaking terms with us is Nelson Smith at Financial Uproar, who’s hosting a stock-picking contest. We were told to submit 4 stocks by December 30. We’ll regroup 359 days from now, assuming we can stave off nuclear war with Iran, and see who gained the most.

We had to pick stocks, as opposed to other investments, otherwise we’d have loaded up on “Mitt Romney will be elected” futures at InTrade. They currently pay 8-to-5.

Of course, entering a stock-picking contest is different than investing. As any poker player knows, the game changes drastically when there’s real money on the line. So knowing that finishing dead last will hurt nothing more than our egos, we were fairly aggressive. With a couple of caveats:

1. We’re not going to win this thing. 

Seriously, we won’t. Not that we don’t believe in ourselves, but intelligence and discretion will only take us so far here. Luck is a huge variable, both as a noun and an adjective. Again, if we could buy futures as part of this contest, we’d look long and hard at buying one called “The winner will have chosen 4 penny mining stocks on the TSX Venture Exchange”. 

But that depends on how many entrants Nelson gets. (12, including himself.) The more entrants, the greater the chance of luck being the biggest determining factor (and rendering our research worthless.) If the objective is to make money, then you don’t have to win this contest to win, if you catch our drift.

2. We’re not looking for long-term investments. We’re not even necessarily looking for stocks that we think will instantly skyrocket. The window is specific: 1 year. A stock whose acceleration will top out in 2 months, or 24 months, won’t do us much good. Heck, if we can get a 25% return out of this contest, we’ll consider ourselves winners. Nelson probably won’t, but we will.

That’s enough qualifying, don’t you think? On with our picks. Our strategy is the same as it is in our real lives: look for temporarily wounded value. A stock with good fundamentals but bad (in the short run) publicity is ideal. A low price-earnings ratio, and either negative or non-existent headlines.

NETFLIX

This fits our criteria almost perfectly. The company took a public relations hit this past summer when it told customers they were going to have to suffer through the barbaric ordeal of having to hold separate accounts for renting DVDs and for streaming videos online. Customers swore they’d never return, and a movement took hold.

We don’t patronize Netflix, never have and never will, but couldn’t understand why customers decried a company that seems to offer selection, speed, and value.

The stock traded at $304.79 in July and is now at $79.30. Cash flow is positive, and profit increases by 50% or so annually. That can’t last forever, but all the indicators are good. Netflix is one of those companies that does better the less it charges. In its early days, memberships cost 4 times what they do today. A company that succeeds on both high markups and low markups will get our attention every time, especially when it’s the undisputed market leader.

FORD

A strikingly low price/earnings ratio, barely over 6. A stock price at an 18-month nadir. And an implicit guarantee that the taxpayers will be there with billions to prop up the company if necessary. Which it won’t be, but investors like to keep these things in mind.

The industry itself is as close to a staple as we have in this society. Ford’s competitors remain in even worse shape than it.

Ford’s worst days are behind it. Yes, its liabilities are greater than its assets, but the numbers are going in the right direction. And the company is profitable. There’s no way we’d invest in Ford until its financials improve a little more, but to enter a stock-picking contest with no downside? Sure.

(NOTE: Not to hedge our bets, but the two of us had to flip a coin on this one. Ford vs. Toyota. If it turns out that a Toyota pick would have ended up winning the contest for us, blood will be shed.)

SEACUBE

This is one of those under-the-radar companies that you never heard of until 2 seconds ago, yet that impacts your life greatly. As the name implies, and as its NYSE ticker symbol (BOX) reinforces, SeaCube deals in shipping containers. The company is on every continent, and just about every freighter.

SeaCube doesn’t even make the containers. It only buys and leases them. Revenue is stable, with a couple of anomalous items distorting the 2009 numbers. Profit margins are enormous, 22%. The company paid out a dividend last month, with a dividend yield of 6.3%.

What gets us excited is its price/earnings ratio, currently under 8. Its peers average thrice that. Because a container lessor can’t expect gigantic growth year-over-year, the only remaining legitimate reason for SeaCube’s low P/E is simply that it’s undervalued. The price is low with regard to sales, with regard to book value…

So why isn’t it more expensive? It’s carrying a lot of debt, although that debt is relatively stable year-to-year. This is one we might buy in the real world, too.

TOYOTA

Alright, fine. We were going to go with GlaxoSmithKline but it’s trading at 40-something times earnings and pharmaceutical companies (or more specifically, reaction to and regulation of them) can be fickle.

Instead, the car manufacturer whose 2011 was as bad as anyone else’s in Japan. The Tōhoku earthquake and resultant tsunami didn’t just kill 20,000 people, they did a number on every manufacturer in the country. No hydroelectric and nuclear power meant no way to build cars, and a damaged seaport meant nowhere to send and receive shipments. Toyota’s sales numbers suffered, and the stock price tumbled accordingly. A positive, at least as far as stock-picking contests go.

Besides, Toyota already knows all about singular events hampering its stock price. In 2009 a series of Lexus owners testified on Capitol Hill that their vehicles were accelerating suddenly and without apparent impetus. What made that unusual was that it’s usually politicians lying through their teeth in D.C., not private citizens. The claims were unfounded: to keep it brief, these imbeciles all confused the brake pedal with the gas. Toyota stock sank to the point where the CEO flew over from Aichi headquarters to control the damage. The stock rebounded and then some, and Toyota maintained its healthy habits of keeping debt under control and buying back treasury stock. Which it continues to do today.

So those are our picks. We’ll keep you updated daily on what they’re doing.

No, of course we won’t. You shouldn’t look at your investments daily, either. We’ll check back on ours quarterly: enough time to see legitimate growth (or shrinkage) develop, without keeping us daily enslaved to a series of numbers beyond our control.

**This article is featured in the Baby Boomers Blog Carnival One Hundred Twenty-sixth Edition**

Filed Under: Capitalism, Education, Investments, Personal Finance Tagged With: , , , , , ,

If We’re Doing Too Many Posts About Whiny Babies, Please Let Us Know

December 28, 2011

We call it obsolescence, sister.

 

We don’t shill for corporate products here on Control Your Cash, excluding the wonderful sponsors whose ads you can scroll down and see. (That’s VRBO.com, everyone! For your next vacation, rent someone’s home and eliminate the middleman!)

And Amazon. Our relationship with the Kindle is equivalent to Peter King’s with Brett Favre, except Favre might return some of King’s calls. As far as we’re concerned, being able to carry your entire library around with you in a device that weighs a few ounces is more impressive than anything Pioneer 11 did or might be doing.

Sometime last year, your humble blogger and his smartphone were perusing the stacks at a Barnes & Noble when a certain book caught our attention. Well, not only can you can get Wi-Fi inside Barnes & Noble, the company brags about it. Which means you can access Amazon.com, which means you can patronize a bookstore’s competitor while in that bookstore, and start reading the competitor’s books right away. Barnes & Noble even gives you a chair if you want it. It’s like they’re trying to destroy shareholder value.

And that’s Barnes & Noble, the corporate behemoth that smaller bookstores used to regard as the epitome of evil. What about those mom-and-pop operations themselves?

Pulitzer laureate Richard Russo spent 12 years in college and somehow never learned a thing about economics. Earlier this month, he bitched in the New York Times about how Amazon itself is now encouraging its customers to do what we figured out (and anyone else could) all by ourselves:

Amazon was encouraging customers to go into brick-and-mortar bookstores on Saturday, and use its price-check app (which allows shoppers in physical stores to see, by scanning a bar code, if they can get a better price online) to earn a 5 percent credit on Amazon purchases.

…

I wondered what my writer friends made of all this, so I dashed off an e-mail to Scott Turow, the president of the Authors Guild, and cc’ed Stephen King, Dennis Lehane, Andre Dubus III, Anita Shreve, Tom Perrotta and Ann Patchett.

(pause)

(Sorry, we were busy returning e-mails from our good friends Queen Elizabeth, President Obama, Paul McCartney, Tom Cruise, LeBron James, Oprah, and Angelina Jolie. Where were we?)

Assuming Russo is telling the truth, Scott Turow has no understanding of law nor of modern life. Turow responded:

… it’s worth wondering whether it’s lawful for Amazon to encourage people to enter a store for the purpose of gathering pricing information for Amazon and buying from the Internet giant 

Not sure what statute Amazon would be violating there, unless they’re encouraging people to enter the stores and render the merchandise unsellable. But the brick-and-mortar bookstores are already doing that themselves, by pricing it too high. Russo continues, in his long-winded and quixotic manner:

A few miles down the road from where I live on the coast of Maine, a talented young bookseller named Lacy Simons recently opened a small bookshop called Hello Hello, and in her blog she wrote eloquently about her relationship to “everyone who comes in my store. If you let me, I’ll get to know you through your reading life and strive to find books that resonate with you. Amazon asks you to take advantage of my knowledge & my education (which I’m still paying for) and treat the space I rent, the heat & light I pay for, the insurance policies I need to be here, the sales tax I gather for the state, the gathering place I offer, the books and book culture I believe in so much that I’ve wagered everything on it” as if it were “a showroom for goods you can just get more cheaply through them.”

Opening a small bookshop in 2011 is like opening a Studebaker dealership in 1966. Or more aptly, a Borders store in 2011. Although we admire Ms. Simons for choosing a Gary dell’ Abate catchphrase for the name of her store.

Ms. Simons’s diatribe is why finance and economics courses should be required at every level of education. Hers is the same illogic echoed by so many of the Occupy Wall Street protestors: I invested in something (an impractical education, a business that can’t turn a profit), so regardless of that investment’s expected real-world return, if any, I demand a payout. Ms. Simons went to college (and financed her education, then took on still more debt before paying it off), and somehow Jeff Bezos and his silly computer engineering degree are “tak(ing) advantage” of her.

No successful businesswoman blames others for her own failure. Adapting to the reality of the market might not be fun, but it’s not like you have a choice in the matter. It’s like when Texas Instruments and their handheld calculators ran all the abacus makers out of business in the 1960s. Those people spent years learning how to put beads on strings in a wooden box, only to have TI, Casio and Sanyo “take advantage” of them. Didn’t the abacus makers have factories? And power bills? And insurance policies? So, so unfair.

As authors ourselves, we should mention that Amazon has been far friendlier to us than any retailer has ever been. We set up an account on Amazon, independent of our publisher, and now take home 70% of every book you buy. Meanwhile, trying to get our book on the shelves at local sellers was a gigantic pain. To do so you have to drive across town, hope you catch the appropriate store employee on the right day, and then, if she’s feeling particularly generous that day, she might offer to take 2 or 3 copies of your book and see if anyone buys them. Then, to find out if anyone does, you have to drive back and see for yourself (or call and waste some poor employee’s time.)

From the consumer’s perspective (and that’s a phrase many independent shopkeepers would have trouble understanding), which is easier:

a) Driving to a local store, stumbling across Control Your Cash: Making Money Make Sense by accident, thumbing through it and then buying it, or

b) Entering “personal finance” on Amazon.com, reading the reviews, then reading a sample, then having it wirelessly delivered in the time it takes you to wait in line at a retail store? For less than the retail store can sell it for? While giving the creator of the work a bigger cut than you give the middleman, if that’s the kind of thing that’s important to you?

It seems we’ve figured out why independent bookstores are doomed. Not just because their business model is obsolete, but the people running them are clueless.

**This article is featured in the Carnival of Personal Finance #342: Happy New Year Edition**

Filed Under: Bad Examples, Capitalism, Education Tagged With: , , , , ,

Beware of IPOs Wearing Bright Colors

December 16, 2011

Dolly was a sheep AND a clone. Sometimes, one visual metaphor can do the work of two.

 

This was the easiest bet on the board.

First, read this genius post that we wrote back in January. It’s about Groupon, the 2011 equivalent of Pets.com or Atari. Unfortunately, there’s no such thing as shorting the stock of a privately held company, or we’d soon be sipping mai tais on the Moon with all the money that we’d have made by predicting Groupon’s demise.

Groupon went public on November 4, finally trading on the New York Stock Exchange after a long courtship period as the new initial public offering darling of the decade. Like LeBron James’ The Decision, only if it was the precursor to a brief honeymoon, followed by an intractable period of anxious consumers waiting patiently and wondering if they’d ever see a return on their investment or if it would crater to zero.

(The 2011-12 NBA season, everyone!)

Six weeks in, Groupon has fallen 10% from its IPO value. The company’s market capitalization is $14.72 billion. That’s more than the market cap of Bed, Bath & Beyond, which is the largest retailer of its kind; a 40-year old company with 1000 stores that actually sells something tangible and turns a healthy profit.  Some Groupon stockholders are holding shares in the hopes that someone more naive will eventually take them off their hands. And presumably, some stockholders think Groupon will permanently increase in value and become a blue chip. These people are buffoons.

Groupon went from local (Chicago) player to international media subject last year. The company’s point of differentiation was groundbreaking, and it was hard to believe no one had thought of it before. Unfortunately for Groupon, plenty of people have thought of it since. You can’t patent the concept of temporary mass discounts, thus Groupon has watched its market share get eaten away by Living Social and other competitors; EverSave, GroupBuy, YourBestDeals, and more combinations of everyday words featuring medial capitals.

As if competition from other startups wasn’t enough, part of getting featured in the business media is having established companies take notice and then try to crush you like a bug. AmazonLocal and Google Offers joined the party in the last few months, as did similar sites from AT&T and American Express, each offering a service indistinguishable from Groupon’s. Unlike Groupon, the others can withstand heavy losses.

And lose they do. Last year Groupon took in $713 million in revenue, the most ever for a company so young. If you think that’s impressive, you’ll be equally impressed to discover that there’s a quantity called “expenses” that’s exactly as important as revenue is.

If you’re unfamiliar, which many people seem to be, here’s how Groupon works in two sentences. Its sales staff hits up a local business, promising it a minimum number of customers if the company temporarily offers a huge discount on some item (a “group coupon”, if you will.) Customers download the coupon from Groupon.com, the catch being that the promised minimum number of customers have to download the coupon or the discount won’t activate.

Sounds great in theory. Why doesn’t it work in practice?

To be kind, most of the businesses aren’t what you’d call sophisticated. Plenty of them refuse to do the math and end up giving away the store, and those are the ones for whom Groupon works best. (As for those businesses which Groupon doesn’t create any new customers for, if no one wants your discounted product via Groupon, at least it didn’t cost you anything to discover that.)

Continuing with our sexist observations, visit Groupon.com and see what most of the deals are for. Spa treatments. Hair coloring. Tapas.

(Aside: Here’s advice for anyone looking to enter the retail business. Sell a product that only men buy. Time is money, and you’ll reduce expenses on every sale. Men, or at least all the men you’d want to associate with, don’t bog down the process with an endless series of questions. They pays their money and they gets out. Meanwhile, most women can’t make it to the counter without seeing how long they can make the transaction last. “Is this low-fat?” “What’s your return policy?” “Didn’t you have this on sale last week?” “Was it made in a factory where they have peanuts?” “Are these ‘blood’ diamonds?” “Will this shrink if I put it in the dryer?” [Read the freaking label.])

What does a merchant learn by partnering with Groupon? More than anything else, where to find the price-sensitive buyers. Which is to say, the worst customers imaginable. The ones who will be loyal to your brand only if you continue to provide the best loss leaders.

Groupon is advertising, not sales. Not that there’s anything wrong with the former, but it should always be secondary to the latter. Remember that next time you invest in a company with negative earnings and a business model that’s easy to copy.

**This article is the pick of the week of the Top Personal Finance Posts of the Week – Merry Christmas Edition**

Filed Under: Capitalism, Education, Finance, Investments Tagged With: , , , , ,
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