Money Won’t Find You. You Have To Meet It Halfway.

August 24, 2012

Emulate this cat’s investment strategy, if not his look

 

The CYC principals work at home and thus employ the Fox Business Network as much of the soundtrack (and in our male half’s case, the visual stimulus) for our daily lives. While listening and desultorily watching, we hear the same corporations mentioned again and again. Lately it’s been the ones you’d expect: Facebook and its declining stock price, Apple and its historic book value, Nike (about to release an expensive new shoe), Best Buy (just hired a new CEO, the equivalent of the Doña Paz hiring a new captain after crashing into the Vector), etc.

All of them are famous, with much of the companies’ values deriving from their brand names. That’s why they’re featured so prominently in the media; or perhaps vice versa.

Name recognition is, without question, the worst possible criterion for determining the worth of a stock. In our above examples we have:

  • A pop-culture leviathan that’s effectively eliminated all its competition, and an advertising vehicle that millions of people lock their eyeballs onto daily.
  • A iconic company that not only makes elegantly designed and famously reliable gadgets and computers, but one that’s discovered how to sell slightly upgraded versions of said gadgets to the same loyal customers year after year.
  • Another icon with a devoted following (albeit slightly less devoted than Apple’s), and which, like Apple, sells a lifestyle and a state of mind as much as it sells products.
  • A retail chain whose death throes are almost audible. A decade ago, it was a legitimately cool place to buy toys: today, it’s a prehistoric version of Amazon. Or of the Apple Store.

Publicity is important for entertainers and their ilk. For corporations looking to make money in the long term (and their shareholders), being in the public eye could not be less important. Groupon has gotten more headlines than Cardinal Health every single day of the former’s existence, but it’s the latter that turned a $1 billion profit last year. And sold $100 billion worth of product (drugs, mostly). And employs 30,000 people. Cardinal Health held its initial public offering in 1983, back when Groupon’s managers and directors were barely alive. But there’s a larger point here than comparing daily deal sites to stodgy old pharmaceutical firms.

Listen. Investing is not supposed to be fun.

Check that. Investing should be lots of fun. It’s a far less laborious (and multiplicative) way to build wealth than is working for 8 hours a day. Maybe we’re unclear on how to define “fun”.

We’ve told you in the past not to buy a stock just because you happen to be a customer. But we can do better than just giving you subtractive advice, telling you what to avoid.

Embrace boredom. Invest in workable, quietly successful companies that the average mouth-breather traipsing his way down the street wouldn’t think twice about.

You know what publicly traded company has the highest profit margins? That is, among all of them? Apple is tops among the ones we’ve mentioned so far, but it’s only 24th among all public companies.

Devon Energy! You remember Devon Energy, right? Of course you don’t, you were too busy reading about that chick with the jacked-up teeth getting engaged to that Nickelback guy.

Devon Energy is a natural gas/oil producer based out of Oklahoma City. They own pipelines that are mostly in Texas but that stretch all the way to Illinois. Devon has operations as far north as the British Columbia-Northwest Territories border.

And you’ve never heard of them. The stock is trading at around $60, which is barely 10 times annual earnings. Last year each share paid 80¢ worth of dividends. Analysts think it’ll hit $77 a year from now. Both revenue and gross profit have increased 20% annually over the last few years, the kind of sustained growth that most better-publicized companies can only fantasize about.

(Notice we didn’t tell you what Devon Energy stock has done in the past year. That’s irrelevant to people who don’t own the stock, which presumably includes you.)

None of your friends will be impressed if you tell them you bought a standard lot of Devon Energy. Rather, they’ll get bored and want to leave the room. Fine. Let them.

Opportunities don’t go out of their way to get your attention. Never forget this. Facebook stock was never going to bring you untold riches. The newsworthy IPOs that would don’t exist.

What about Google?

Fine, you got us. Also, retroactively picking stocks is cheating. Google was enjoying healthy if not tropospheric profit margins from Day 1, unlike Facebook. Google was a relatively small player back then: its revenue has grown 38-fold since then, its profits 90-fold. (If you want to see how humorously ancient some business news stories from as recently as 2004 read, check this out.)

When you’re done reading Devon’s financials (a spirited way to spend a Friday afternoon), check out the public companies with the 2nd– through 5th-highest profit margins:

  • MGM Resorts, owners of half the fanciest hotels on the Las Vegas Strip, several in China and Vietnam, and a few bottom-of-the-market yet still highly profitable toilets in Detroit and on the Redneck Riviera.
  • VISA, the favorite creditor of personal finance bloggers across the country.
  • Corning, who probably made the glass your phone is encased in.
  • Gilead Sciences, makers of antiviral drugs. Tamiflu is their most famous one.

Admit it. You’ve never heard of at least one of those companies, and never gave the others a second thought.

We’re not going to do all the work for you. That’s part of the reward. Go to the general-purpose finance site of your choice (our favorite is Yahoo! Finance). Read the quarterly and annual financials, available to everyone, and take a freaking risk that your 401(k) doesn’t offer.

Columns of numbers. God, that sounds like a party.

Do you have to read interoffice memos? Or employee handbooks? Or TPS reports? What the hell’s the difference? Aside from how reading financial statements can make you money. You like money, right?

I don’t know how to interpret them.

Sure you do. Read this first.

You should all be rich, or at least upwardly mobile. The resources are at your disposal, waiting to be capitalized upon. The research is so easy even that dippy, chunky gal from So Over Debt can do it. (Mmm…dippy and chunky.) Stop reusing your paper towels and do something remunerative with your time. You’re welcome.

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

IPOs for Beginners

March 21, 2012

 

You mean a site where people give their opinions about restaurants is worth billions? Sure, sounds good to me.

This article appears in drastically different form on Investopedia.  

“IPOs for beginners”. As a concept, that’s similar to “International Space Station repair for beginners.” No less an authority than Benjamin Graham, author of the definitive investing guide The Intelligent Investor and mentor of Warren Buffett, believed that initial public offerings were way beyond the neophyte investor’s level. He was largely right, but why?

Who wouldn’t want to be among the first to enjoy a promising new stock, one that no one else at the cocktail party had the privilege of investing in as early as you did? IPOs are tempting, if you’re the kind of person who loves shiny new toys and the general feeling of exclusivity that accompanies them. But at least you can physically show off your iPad 3 or PlayStation Vita and receive tangible oohs and aahs. That’s considerably different than telling everyone you meet that you hopped aboard the Groupon bandwagon when the rest of the world was still showing their IDs at the ticket counter. There’s little that’s conspicuous about a particular new entry in an online brokerage account.

Graham thought IPOs were only for seasoned investors for several reasons, one of them being that the previous private owners are often looking to cash out much of their holdings. The underwriters set the price of the typical IPO at a premium specifically to take advantage of a seller’s market. With limited supply, and highly publicized if not unlimited demand, what would you expect to happen to the price of a stock when it’s first offered to the public? (It’s a rhetorical question, and if you really need the answer, you shouldn’t even be considering investing in an IPO.)

Graham died a quarter-century before the original dot-com bust, and everything that’s happened since would only reinforce his position regarding who should invest in an IPO. Almost by definition, most initial public offerings are of companies that haven’t been around a long time. Lately, the companies haven’t even needed healthy records of revenue growth and profit, either. But with a proliferation of aggressive venture capital firms looking to back winners, and the financial media having ever more reach among amateurs looking for an exciting place to put their money, one thing is certain: the next Pets.com or eToys won’t be hurting for investors on its opening trading day.

Last November, Groupon “finally” went public after endless rumors. (“Finally” is in quotes because while most of Groupon’s existence as a private company was spent anticipating the IPO, that existence was only three years. The company was founded in November of 2008.) The company was on top of the collective consciousness as the hottest of all possible IPOs, at least until the day that Facebook goes public. Groupon acknowledged in SEC documents that it was on pace to lose half a billion dollars a year, and investors still kept coming. Once the institutional investors got paid, and GRPN finally became available to the ordinary public, the stock had fallen from its introductory price. A scant 4 months later, Groupon stock has lost almost a third of its value, which is fairly impressive seeing as earnings are about a negative dollar per share. Groupon’s never reached its IPO level after a couple of weeks of trading, and might never again.

Of course, all IPOs aren’t Groupon. VISA went public after decades of renown and profit, but even its IPO wasn’t available to anyone but institutional investors at the start. The same will go for Facebook. The company’s primary stockholders will profit the most – the very day it goes public, in fact. The initial lenders will get on their knees and thank the God of their parents’ choice. After a few more iterations, the most anticipated stock in recent history will trickle down to average investors at a price that could be a bargain, or could be a local maximum. There are more prudent ways to invest.

Take an example of a company whose stock is about as far removed from an IPO as possible – United Technologies. The Hartford-based aircraft engine and elevator conglomerate has been a component of the Dow since before World War II, and probably hasn’t been above the fold in any story in The Wall Street Journal since then. Most people have never heard of United Technologies, and the company brass prefers it that way, thank you very much. Nothing, not even a fire alarm, will clear out a room faster than telling people you recently went long on UTX stock. But an interesting thing about United Technologies’ performance is that you can examine its price movement over almost any arbitrary period,  and the graph will consistently move up and to the right.

Investing should have one solitary, overarching objective – to make money. Getting excited about an IPO for its own sake isn’t investing so much as it is flamboyance. The people who got in on Google’s ground floor, you can count on both hands. It’s tempting to think that you could have been one of them, or that you could be in a similar position when the next IPO comes available, but building wealth doesn’t have to be that capricious. Find an established, undervalued, temporarily wounded stock, and you’re far more likely to turn a long-term profit than someone starry-eyed over the latest company to be listed publicly.

This article is featured in:

**The Carnival of Personal Finance-Invest in Yourself Edition (Editor’s pick)**

**Totally Money Blog Carnival #60**

Filed Under: Investments, Investopedia, Making Smart Choices 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: , , , , ,
Next Page »