What Makes A Stock Drop Like A Hailstone?

July 25, 2012

NOTE I: 

Welcome to our ProBlogger readers, wondering what you stumbled upon and whether it applies to you. (Unless you’re a trust-fund brat, it does.) This is the one personal finance blog that will not only help you build wealth, but periodically enrage you while doing so. More here. 

NOTE II: 

To our regular readers who didn’t understand the previous paragraph, we wrote a piece on ProBlogger. Does it apply to you? Absolutely it does! It’s the detailed explanation of why we don’t allow comments on the site. If you want to contact us, try Twitter. Or Facebook.

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Let’s look at Monday’s biggest percentage losers, among companies with market capitalizations of at least $1 billion:

Multiple choice quiz time. What single event could cause a company’s stock to lose 28% in a day?

  1. CEO strips naked, runs into local TV studio during 5 pm newscast.
  2. Company executives plead guilty to multiple counts of fraud and embezzlement.
  3. Customers develop necrotizing fasciitis after touching company’s product.
  4. Lawsuits, or the threat thereof. And government regulation, or the promise of same.

Based near Grand Rapids, Michigan, Gentex makes auto-dimming rear view mirrors, and rear cameras for you people who think clueless children riding on tricycles behind parked cars are worth saving. Gentex also makes dimmer switches that are supposed to replace the shades on airplane windows. The company got its start in the 1970s by selling smoke alarms.

A month ago, Gentex got sued by a competitor who claimed that Gentex infringed on a patent for improved car headlamps.

Furthermore, Gentex was banking on the promise of those dead and dismembered children. The National Highway Traffic Safety Administration was supposed to mandate rear cameras on all new cars, an obvious windfall for market leader Gentex. And an obvious hassle for the rest of us, who’d each be paying $200 or so more for a new car. But the NHTSA hasn’t made a decision yet, and doesn’t plan to until the end of the year. (As for what backover accidents have to do with a government bureaucracy whose name implies a mandate for highway traffic, we’re not sure.)

Next up is DeVry, which announced that it’s getting harder to lure students. For one reason, the other for-profit colleges are ramping up admissions. Also, after decades of cluelessness, traditional colleges are figuring out that they can offer online education without compromising their precious accreditation.

Bruker is a German manufacturer of x-ray machines, spectrometers and stuff. Bruker committed the least forgivable sin of all, failing to meet analysts’ expectations. A single disappointing earnings report led to Monday’s fall, illustrated here:

 

Elan is an Irish drugmaker. Why did its shares fall by 1/6? One word. Bapineuzumab! Or if you prefer, C6466H10018N1734O2026S44. 

It’s an Alzheimer’s treatment, and it hasn’t done so well in recent trials. Alzheimer’s patients didn’t respond any better to bapineuzumab than they did to placebos, even among the patients who thought the placebos were jelly beans and tried to shove them in their ears. Elan produced bapineuzumab in conjunction with Eli Lilly, Johnson & Johnson and Pfizer (OMG collusion!) all of which took smaller if still significant hits.

And Lexmark you’ve probably heard of. Based out of Lexington, Kentucky, they make printers. (And would presumably be named “Virginmark” if they were based out of Virginia Beach. Not funny? Go to hell.) Lexmark got wounded by the same problem that hit Bruker – either weak results or unduly optimistic analysis by the forecasters.

Lexmark’s 3rd-quarter profits were 75-85¢ a share. This for a stock that trades around $18. In a vacuum, that sounds pretty good. In a world where analysts have determined that Lexmark should have made 89¢ a share this quarter, it’s cause for panic. Fleeting panic, anyway.

What’s the point? 2 points, actually:

  • It’s still a marathon and not a sprint. Unless you’re 98 years old, in which case we take it back, it’s a sprint.
  • Don’t let analysts make decisions for you.

Meeting projections is what Soviet central planners did. A relatively free economy doesn’t lend itself to narrow projections, especially among independent analysts to whom a public company is an abstraction, a prospectus, a series of symbols.

If your question is which stocks to avoid, understand that a stock only becomes worthless when the market renders the underlying company obsolete (Research in Motion, any minute now), or if it turns out that the emperor never had any clothes to begin with (Enron). And dying companies don’t die suddenly, at least not on run-of-the-mill news like one of many new products not doing well in tests. Or 3rd-party expectations not being met.

Gentex remains a market leader, and the NHTSA’s refusal to mandate rear cameras seems like a mere deferment, rather than a policy change. (“What? You just want children to die?!”)

Elan is still in a burgeoning industry, one that won’t be going anywhere until we learn how to genetically engineer babies in the womb. Lexmark is still profitable, and trading at barely 4 times earnings. (At a 3-year nadir, no less. Just like Gentex.)

DeVry has an attractive price-to-earnings ratio too, under 7, and it’s easy to see its low price (a 7-year nadir) as a buying opportunity. But it’s also the only company on the list of today’s biggest losers whose business model might be getting rapidly outdated. (Apollo Group, the parent company of the University of Phoenix, is in a similar position.)

DeVry enrolment is down 20% from last year, which we’re taking as a good sign – fewer people will spend a semester at night school when there’s the possibility of actually working instead. For-profit graduates are also learning, for lack of a better word, that a DeVry degree in justice administration or business communications just doesn’t mean what it used to.

(Which is a joke, of course. It never meant anything.)

Traditional colleges don’t have that problem. They’ve managed to convince kids and parents that there are irreplaceable benefits to a college education, and that belief is a hard one to uproot. Furthermore, traditional colleges have endowments, legacies, and football programs that make money without having to pay the players. Also, such colleges don’t have shareholders. If the University of South Florida (or more aptly, Penn State) had a board of directors instead of regents, the liquidation would have started a while ago.

Which isn’t to make this a jeremiad against higher education. We do that often enough as it is. Instead, we implore to never invest without thinking. And to understand the difference between a daily blip that’s ultimately meaningless, one that will soon be forgotten; and the recognition of a major shift in a particular economic sector.

THINK. While you’re at it, stay emotionless. If you’re among the poor unfortunates who own Gentex stock, think of today as an opportunity to engage in some dollar-cost averaging. If we’d lost on DeVry stock (or on Apollo Group), we’d bail.

Filed Under: Investments, Making Smart Choices, Net Worth Tagged With: , , , , ,

The Streisand Effect, Revisited

July 13, 2012

Maybe she should invest in Revlon

 

To quote one of America’s dippiest celebrities on her investment strategy:

We go to Starbucks every day, so I bought Starbucks stock

Your humble blogger drives a Ford every day, and wouldn’t touch Ford stock with Ms. Streisand’s nose.

This is the stupidest way imaginable to invest. Equating the utility of a company’s products with the strength of the company’s finances is like saying “Brett Myers can throw a 91 mph fastball, therefore I bet he’d make a great husband.”

But back to the mentally deficient celebrity at hand. Ms. Streisand is more fortunate than you in that she can get rich (and did, and does) off active income. She’s one of those extremely rare people in that her talents alone made her a multimillionaire. She didn’t have to leverage her money and time, defer spending, and research investments in order to get rich. Her voice and acting chops did it for her. Furthermore, she can afford to lose millions in the stock market and not flinch. Depending on how big Ms. Streisand’s Starbucks position is, were the stock to tank, there’s a corresponding number of nights she can perform at the MGM Grand Garden Arena that will wipe the losses away.

 

Other companies we patronize daily include Nevada Energy (stock trading at close to a 52-week high) and Nestlé (makers of Friskies cat food, stock in a similar position to Nevada Energy.) Two companies, one a utility, one a multinational leviathan, both of which have something of a ceiling on their short-term growth. We need better reasons for investing in something.

Our investments include the following:

  • Netflix stock. Despite never being a member, and never wanting to. Your humble blogger hates both movies and subscriptions. But tens of millions of other people feel otherwise, and investing is more about considering what those other people are interested in, rather than what the investor is interested in.
  • Altria stock. It’s hard to imagine a stupider activity than smoking, but tell that to the billions of people around the world who see inhaling tobacco fumes as a perfectly normal thing to do. Hell, if it’s good enough for the President of the United States, why not?

If other people are going to behave irrationally (e.g. by smoking, or gambling, or drinking, or incurring credit card debt), and no one’s going to convince them not to, why not profit off them? It’s the responsible thing to do. Until mankind wakes up one morning and collectively decides, “You know something? Maybe actively introducing carcinogens into my respiratory system isn’t a bright idea. Time to stop now,” which it won’t, we’re going to continue to be indirectly responsible for selling them their poison.

  • Houses in lower-middle class areas. Because, as always, the price was right. Is right. “You make your money going in” is one of personal finance’s all-time great truisms. An inexpensive house that requires a minimum of upkeep (no lawn maintenance company to hire, no pool to clean) is easy to rent. The renters make the mortgage payments (and then some), leaving the landlord with a profit that requires just a little paperwork to maintain.

That’s exploitation of the poor.

Sure, if you say so.

Now that we’ve got the reactionary simpletons out of the room, let’s resume. Renting out comfortable shelter to people is the opposite of exploiting them. It’s providing for them – meeting the most basic of their requirements, no less. For a fair price, one made even more fair by the fact that these renters can’t afford to buy a house. We advocate home ownership on this site, multiple home ownership if you can do it, but not everyone’s in a position to buy. And we might as well make money off some of those otherwise disenfranchised people. Because someone is going to. So why not us?

It’s the same principle as that advocated by buying Altria stock. Say we were to wrap ourselves in righteous indignation and decide, “This is a travesty. Smoking kills 135,000 Americans every year – an entire Topeka or New Haven – and we won’t be a party to the wholesale genocide any longer.”

That position isn’t going to save a single life. And even if it did, why should we care? Altria customers gladly sign their own death warrants, in exchange for rich and mild satisfaction. On a far smaller and more benign scale, the same goes for Netflix customers. If they want to pay big markups for a service that we have no interest in, why should that be our concern? It might not be our business, but we’re making it our business. To the tune of increased returns (and in Altria’s case, years of ever-increasing dividends.)

Umbrage never made anybody rich. It’s a childish emotion…actually, that’s not fair. It’s an adult emotion. But it doesn’t matter. It’s an emotion. Any of which – anger, joy, trepidation – gets in the way of the subject at hand, which is earning enough money via our financial acumen that we can escape our unfulfilling jobs and subservience to The Man.

“Cold” is never intended as a compliment when attributed to a human, and “rational” isn’t regarded much better. But coldness and rationality are critical if you want to grow your money. If you’re going to get excited about a stock, do so because it’s grossly undervalued and no one else seems to notice. Not because its IPO is coming up and you think it’ll be fun to invest in it. Otherwise, have no emotions whatsoever.

Another company we have a big position in is Tesco, a name unfamiliar to most people on our continent. It’s the UK’s largest retailer, their answer to Walmart, with a smattering of stores around Asia and the rest of Europe. We’d say we’ve never patronized Tesco, only looked at the company’s financial statements, but it turns out that indeed we have given them our business.

Tesco also operates a few grocery stores under a different name in the United States: Fresh & Easy. If you’ve never been to one, and if you don’t live in the Southwest you probably haven’t, Fresh & Easy is one of the most self-righteous and condescending places we’ve ever patronized. When you shop there you make a statement, something along the lines of “Slap the word ‘organic’ on a package and I’ll nod my head in brainless approval. Plus I don’t have the budget for Whole Foods.” (If you’re wondering, the statement we made was “We’re stuck in Phoenix, we need milk, and this is the closest supermarket.”)

The parking spaces closest to the door are reserved for…well, here’s a picture:

 

 

(Aside: That’s not a handicap sign. It carries zero legal weight. Yes, we parked our 18 mpg SUV there and didn’t flinch. Besides, if management really cares about ecology, they’d let us park as close to the door as possible instead of forcing us to burn fossil fuels looking for a space somewhere else in the lot. A point we never got to share with the scrawny, disdainful man in the Nissan Leaf who gave us his approximation of a death stare when we disembarked and entered the store. A, You don’t know what’s under the hood, Slugger. B, No, we’re not going to pop it for you. Take it up with management. Guy looked at us as if we were ordering napalm strikes on the Amazon rainforest.)

The point is that this Tesco subsidiary is the kind of place we’d only spend money at under rare circumstances, and would rather make fun of. But the money rolls in, and as an investment, we love it. Tesco carries minimal debt, continues to build tons of market share, and has a history of dividends (even though its American operations are struggling – the company’s recently closed over a dozen stores.)

Smarmy environmentalism isn’t our thing, but again, this isn’t about us. It’s about the market. What other consumers want to buy. What producers, in this case Tesco management, want to offer. And that’s a far more sound investment strategy than “We visit ESPN.com every day, so we bought Walt Disney stock”, any day of the week.

Filed Under: Capitalism, Investments, Making Smart Choices Tagged With: , , , , , ,

It’s Time To Get Unbalanced

June 8, 2012

Also, the circus pays next to nothing

 

NOTE: A big, sloppy welcome to all The Simple Dollar readers who discovered us this week. Unlike that site, where the comments are the only parts worth reading, here it’s the exact opposite. (Primarily because we don’t run comments. If you want to say something compelling or critical, try us here. Check out the archives, too. Reams of actionable, non-obvious advice and analysis for the upwardly aspiring. Enjoy.) 

Can you handle another food/investing analogy? Well, you’re getting one.

The standard recommendation is to invest 60% of your portfolio in stocks and 40% in bonds. Or (110 – your age)% in stocks and (your age – 10)% in bonds. Or 57% in stocks and 53% in bonds (awesome if you can do it). All of the above are useless, pointless and unhelpful.

It’s like saying 40% of your daily caloric intake should be carbohydrates, 30% protein and 30% fat.

Okay, then let’s eat a diet consisting of 40% Gummi bears, 30% bearded seal meat and 30% lard. DONE!

You can’t look at classifications. They tell you nothing. You have to look at individual cases. Otherwise, you’d be forced to believe that:

-All pit bulls are dangerous
-All Jews are stingy
-All blacks enjoy grape soda
-All Armenians beat their wives
-All Canadians are sensitive.

Alright, that last one is demonstrably true.

Yes, we get the conventional wisdom. You’re supposed to be invested in equities when you’re young, i.e. when you can withstand greater variation in your investments. If you’re 22 and you get wiped out because you loaded up on Electronic Arts stock, the thinking goes that it’s not the end of the world because you have decades left in which to earn money. And if you bought lots of Recon Technology (a penny stock that’s up 4- or 5-fold this year, and will probably come crashing down to Earth soon enough), well, that’ll increase your options and require you to work incrementally less hard for a living in the long road ahead of you.

And when you’re old, you need to limit your downside – and by extension, your upside. No fancy swings for me, young man. Instead I’ll load up on debentures and other low-risk investments. I just want to come as close to a fixed income as I can. Now let me watch 60 Minutes in peace, and turn that damn music down.

No one should invest in asset classes. But people hear advice that’s easy to swallow, or at least easy to remember, and they say to the person in charge of their 401(k), “Put me in that one fund, with the 60-40 stock-bond split.” BOOM! Investing now completed! That was easy!

When you passively manage your investments – that is, when you get someone else to do it – you’re letting that person dictate your potential return. More accurately, you’re letting that person’s biases and instincts dictate your return. Here’s what we mean:

Your company’s comptroller has one overriding professional objective, and it has nothing to do with making sure you have a comfortable retirement. Rather, it’s far more mundane. Like most people on this planet, all he wants is to keep his job. Same goes for the fund manager’s representative who shows up at your workplace on open enrollment day. She could give a damn whether you sign up for the aggressive no-load fund or the generic income fund. She just wants you to sign up for something, and wants you to not lose so much money that it’ll jeopardize her position.

Further up the chain, the fund manager is playing it conservatively, too. Invest in too few blue chips, and you’re running the risk of higher returns. Which means you’re running the risk of lower returns, which if they come to fruition could lead to angry investors. Enough angry investors means the fund manager gets fired and has to do something else for a living, maybe even work retail in a building with fewer than 80 floors. Most fund managers would rather die, so they continue playing it safe, creating largely indistinguishable mutual funds that each do not-too-horribly. And everyone’s happy. The fund manager doesn’t have to worry about returns that are far from average, the Morgan Stanley or Ameriprise advisor doesn’t have to worry about losing your company’s business, the aforementioned comptroller thus keeps your company’s owner satisfied, and your future is now invested in a hideously complex 401(k) that includes minute amounts of hundreds of large companies, almost all of which will stay stable enough on balance to keep your investment from vanishing.

But you can do so much more. It doesn’t matter how old you are, what your sensitivity to risk is, or whether Dave Ramsey thinks your portfolio incurs a suitable split between stocks and bonds; underpriced securities (really, underpriced investments of any kind) are always there, and always available to whomever’s in the mood for mostly free money.

Buy individual stocks, not just mutual funds. Stocks with powerful fundamentals are always worth buying. And if you’re unclear, by “powerful fundamentals” we mean regular profits, little debt (or at least, debt that the company’s profitable operations can afford to cover), possible treasury stock, and a high ratio of assets to liabilities. If any of those terms sound unfamiliar, buy our book.

God’s greatest gift to the amateur investor is stocks whose prices have temporarily fallen for irrational reasons, yet whose underlying businesses still have those powerful fundamentals. When public pressure is on the stock of a healthy company like British Petroleum to fall (as it was a couple of years ago), or on Netflix to fall (as it was last autumn), that’s a buy sign if ever there was one. It’s the exact opposite of the recent love-in between dilettante investors and Facebook, a company awash in publicity but with no publicly verifiable financial data to speak of. Quite the opposite, in fact.

Unballyhooed is good. Temporarily beleaguered is good (accent on “temporarily”). But nothing substitutes for a strong set of financial statements. A mere $3 can get you on your way to learning how to add a little self-determination to your investing. And give you a chance to make far, far more than if you’re merely letting someone else pick out a mutual fund for you.

Filed Under: Estate Planning, Finance, Investments Tagged With: , , ,
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