Wednesday, July 27, 2011

Debt limit? Schmebt Limit. I'm Investing

That was some market plunge Wednesday. It was ugly. My own portfolio was crushed by a single-day 2.6 % loss.
And there may be more to come.
The debt ceiling debate is reason for concern. The fact that our government representatives look like a bunch of bumbling idiots with so much at stake is an even bigger concern.
But as an investor, I have to look at this embarrassing gaffe as a potentially great opportunity.
Not only is this stalemate driving down stock prices at a time when companies like Apple and Amazon are posting monster growth and profits, but its resolution has the potential to be a catalyst to drive stocks even higher than they were before.
Those who take a chance when prices are low and things are still uncertain could be rewarded.
Sure, investing before things are resolved is a risk. But investing is all about risk.
I can't offer any insight on the ramifications of the debt limit not getting raised, or what happens if the U.S. gets downgraded as a debt risk. There's plenty out there to read on that.
But I do know that I've read a number of pieces about using this as an opportunity to buy low and they have me leaning in that direction. Even Jim Cramer is instructing his audience to do so.

With that in mind, I've reloaded my brokerage account with a few rounds and look to set my sights on a bargain or two.
I'm putting my focus on two areas:
  • Fast growers whose shares slap back sharply or fail to get the post-earnings boost they should have.
  • Dividend payers whose yields were driven up by the dip.
Growth first 
In the first group, the fast growers, I'm considering at least these four stocks:
  • Apple (AAPL) - Killer quarter and still has a low valuation. This is a stock that shouldn't be pulling back at all, yet it lost 2.6 % Wednesday. I may add to my holdings.
  • (AMZN) - I'd written off this stock much the same as I did Apple after it had a great run in 2009-10. It's continuied to show me that was a mistake, and its results reported this week show there's plenty of growth to come.
  • Boston Beer (SAM) -  This great beer maker looks poised for better growth in coming quarters as it gets better prices on ingredients. To see what I like about SAM, read this.
  • National-Oilwell Varco - The oil and gas drilling supplier has been on my radar since it was below $70. Now $6 down from its $86 high, NOV may be giving me the entry point I was looking for.
The dividend payers
  • Vodaphone (VOD) - The European mobile communications company could see its yield pushed back up over 6 % despite a strong quarter.
  • Annaly Capital (NLY) - Yes, it's a risk to invest in this mortgage-backed securities play. But if it dips any lower, it's yielding some 17 percent. To me, that's a risk worth taking, at least with a small position.

Which of these stocks I choose to pull the trigger on will depend a lot on what happens and how the stocks behave over the next few days. Of course, this could all be for naught if we wake up Thursday to news of an imminent deal.
Would it be selfish to ask our boys and girls on Capitol Hill for a couple more days of suspense?

My portfolio down 3.29% year to date. See it here.

Sunday, July 24, 2011

Can Apple Co-Exist With Other Tech In a Portfolio?

Apple has fast become one of my largest holdings, and I may look to increase it yet again soon.
The reasons are simple: It records blowout quarter after blowout quarter. It's eating up market share in laptops, desktops and phones and it owns the budding tablet business.
But Apple's success is not without problems for my overall portfolio. There's an iCloud that comes with this silver lining.
I have two companies in my portfolio that compete with Apple to some degree: Adobe Systems and Synaptics.
Adobe, the more familiar name,  is the maker of creative software for professionals and consumers, the purveyors of Flash, and the creators of the ubiquitous PDF.
I have liked this company for a while. Working in the publishing business has shown me how indispensable some of its products are, whether it's Photoshop or InDesign or InCopy. Most publications use all of them, and switching to other platforms --  if possible -- is painful, requiring both a capital outlay and much training.
But Adobe has also landed itself in some nasty feuds with Apple.
The spat over Flash might not be particularly troubling to Adobe's bottom line. Flash makes up only a fraction of a percent of what Adobe earns.
But when Steve Jobs comes out and calls a company "lazy," people take notice. Analysts take notice. Investors take notice.
Is a bet on Apple a bet against Adobe?
I don't think so. While the two may have some overlapping products, each business has its own core. Adobe's is in its creative and business products, such as Photoshop, Illustrator and Reader. I think it can continue to grow with these products and expand their use as the web evolves.

Touchy subject
Synaptics is another story. You may have seen the name somewhere on your laptop. The company is a leader in touchpad technology. It rules the laptop market and indicated last quarter that investors can expect it to do the same in the smartphone market.
The non-iPhone market, at least.
Because Synpaptics is such a big supplier to Apple competitors in these areas, there are some who regard investments in the company as bets against Apple.
I'd owned Synaptics before I'd bought Apple, but this now has me wondering if the two companies can co-exist in my portfolio.
Is a bet on Synaptics really a bet against the growth of Apple, a much larger holding for me? Or is there enough room in the smartphone, tablet and laptop makets for these two companies both to prosper?

Stay tuned
Synaptics will report quarterly results on Thursday. We all know Apple crushed estimates for the same period.  I'll be interested to hear what the company reports and has to say about its future prospects. If I don't like what I hear, I may just flip that money into Apple.

Would you consider having these three tech names in the same 15-stock portfolio?

Wednesday, July 20, 2011

Lessons From an Apple Investment

If you own or watch Apple stock, you know the company simply crushed analysts' estimates for the past quarter.
It was just three months ago that I abandoned my long-held prejudice against the stock (which I detailed here), and took my first bite of AAPL. Two more buys followed as it slumped to $315.
I was elated to see the company do what I thought it would on Tuesday. Announcing financial results beyond what anyone paid to analyze the company was expecting has become the Apple routine. And not by a little, but by a mile.
Apparently, I was right in my sober assessment of the company this spring, when I decided it just looked to cheap to pass up.
Score it a win, at least for now.

Tuesday's results also had me thinking about what other lessons I could take from my Apple ordeal.
It has me considering two things:
  1. Are there any other companies out there that I had at one time been considering, but then wrote off because I'd "missed the move" up? I very well could have other winners sitting right under my nose, but long ignored or willfully abandoned the way Apple had been.
  2. Are Apple's shares still cheap at $390 or more?
Buying more Apple up here at first seems ridiculous to consider, especially since the stock was just sitting at $315 three weeks ago.
But Apple still sells at a meager 18.5 price-to-earnings ratio, with these growth numbers:
  • Sales up 82 percent. 
  • Quarterly net income doubled. 
  • Cash flow up 131 percent.
That's pretty strong growth. A smaller company would likely be commanding a much higher price.

I'd been resiting adding to my Apple shares because the company now makes up more than 12 percent of my portfolio. But maybe I'm constraining myself on that, keeping myself on a leash that just can't reach another solid investment sitting right in front of me.
At near $400, I may remain weary. But on a pullback, I could be an Apple buyer yet again.
Until then, I'll be content in knowing I made a good choice in the spring and continue looking for good opportunities.

Monday, July 18, 2011

Take Some Time to Read This Book on Investing

If you're fairly new to investing and you have not yet read Peter Lynch's One Up on Wall Street, put it on your summer reading list.
It's a story that instills confidence that you don't need to be a professional to make money in stocks. In fact, as the title suggests, Lynch shows that you actually face some advantages over those stock-picking pros.
It's a good guidebook to avoiding pitfalls and capitalizing on opportunities, written by one of the most successful investors of our time.
But one of the book's most valuable lessons for new investors lies in how Lynch simply and smartly outlines six different categories of stocks:
  • Slow growers
  • Stalwarts
  • Fast growers
  • Cyclicals 
  • Turnarounds
  • Asset plays
When we look at a stock, we should be figuring out where the company falls on that spectrum.
When we do so, it helps us to start putting numbers into context.

Comparing apples to oranges
Just this week, I came upon two fellow stock investors gazing at a computer monitor, shaking their heads. They were pointing at Netflix' price-to-earnings ratio of 82 and wondering why anyone in his right mind would buy a stock with a P/E that high.
Pfizer was selling at 20. Netflix, 82. Pfizer appeared the better bargain, by a long shot.
Problem is, you're not comparing apples to apples. In Lynch's language, you'd be comparing a fast grower (Netflix) to a stalwart (Pfizer).
If Pfizer, with slow and steady growth, were priced at an 82 P/E, it would be insanely expensive.
And if Netflix, with its rocket-fast growth, were priced at 20, it would be like discovering a box of your favorite candy bar mistakenly priced at a nickel apiece.
Another new investor told me Apple's price-to-book ratio scared him off. He was worried the company was terribly overvalued.
This was a case of an investor trying to evaluate a fast-growing tech stock as if it were a stagnating asset play.You buy Apple for its fast, consistently growing earnings.  It's not going to go out of business soon. Nor is it getting eyed up as a cheap buyout. Its book value is less important.

Pick your play
While some investors may choose to stock their portfolio with only old, reliable stalwarts, or only fast growers, I like to pick from across the categories.
I think doing so offers another level of diversification on top of diversifying across different industries.
I also think that evaluating stocks across these different categories is fun and rewarding.
Think about picking stocks the way a football team's offensive leader picks plays. He assesses the situation, considers the options, and he calls a play he thinks is appropriate.
Sometimes, it's a handoff to a back for a few yards.
Sometimes, it's a quick pass 7 yards ahead.
And once in a while, it's a long rainbow toss down the field.
A good team has to keep all of those plays in its portfolio, and all require different skills.
It's much the same for an investor.
A slow grower with a low P/E takes a clean exchange to a running back who can get you three yards in a cloud of dust.
A stalwart takes an accurate throw to a receiver who can cut sharply back for a first down.
A fast grower requires the ability to throw long and go long. Not only that, it takes the skill to throw not to where a receiver is, but where that receiver is going to be when your pass gets there.
And that's exactly what investors in Netflix are trying to do.
That 82 P/E is the quarterback's best guess as to how far down field his speedy receiver can get. If he doesn't overshoot, there's a good bet he may have a touchdown on the play.
With that in mind, Netflix may still look pricey.
But sometimes, you've got to take a shot down field.

Tuesday, July 12, 2011

I Fled China. Now How Can I Still Make Money There?

I got out of China a few months back, and with good reason. With Chinese stocks listed on American exchanges being proven as frauds left and right, I'm not willing to take my chances on owning any right now.
While efforts are underway to provide some transparency and oversight, I think an environment of trust is still a long way off.
With that in mind, I wrote off Chinese stocks.
But does that mean I have to write off the possibility of making money there?
Let's face it, China is the world's fast-growing economy. Its hunger for energy and for materials grows.
It also has a burgeoning middle class eager to consume.
There's a lot of money to be made there, and somebody's going to make it.

But how do I get a piece of that pie without exposing myself to the risk of investing in a Chinese company that's cooked its books?

I see two possibilities:
  • Investing in an exchange-traded index fund (ETF) with exposure to China.
  • Investing in established, non-Chinese companies who have a growing customer base there.
An ETF seems like the easy answer. There are more than 25 ETFs dedicated to offering investors access to China.
Each one (that's not a leveraged fund) is invested in at least a two dozen Chinese companies. These give investors the chance to access China while spreading out their risk across many companies, rather than just a few.
Sounds good at first blush, but I see problems, including two glaring ones.

Bigger basket, not better basket
There are only so many Chinese companies available to invest in on American exchanges. When you build a bigger and bigger basket, you're adding poorer companies to the ones you might like.
Slow growers mix with good growth stocks. Dead money waters done attractive prospects. What you end up with seems to be a pretty weak tea.
I've read that there's a better breed of Chinese companies available on Chinese and Hong Kong exchanges.
But stocks on those exchanges also face less transparency and reporting rules as those on the American exchanges. So, you're essentially trading one risk for another.

And about that risk
The second problem is also one of risk. ETFs that are dedicated to Chinese-based corporations -- on any exchange -- are not protected from more widespread fraud in China. If the problems with cooked books are systemic, then an ETF may only fool investors into thinking our money is safer.

A better alternative?
Which brings me to Option No. 2 -- Investing in non-Chinese companies that sell goods or services in the country. Not my initial pick, mostly because I saw myself needing to load up on a bunch of companies to get the same exposure to China as one ETF purchase would offer.
This option quickly became more attractive to me, for a few reasons.
  • You choose these companies based on their fundamentals and real prospects for growth, not just in China, but worldwide.
  • You choose companies you're more familiar with, that have established themselves in the U.S. and other parts of the world.
  • You're in better command of what you own. Keeping tabs on a few companies is a little work each week. Keeping tabs on 50 Chinese firms in an ETF is impossible for a lay investor.
  • You don't have to invest all at once. No need to plunk down 10 percent of your portfolio tomorrow on the FXI. You can add companies youI like over time, building up your China exposure with quality investments.

In fact, I've already started.
Ford's sales in China grew 19 percent over last year. Apple may triple revenue from China over the next two years, analysts say. Berkshire Hathaway owns a large share of Chinese automaker BYD.
Those are three of my largest holdings.

More to come
I'll be taking a look at other companies that I can add to my portfolio for China exposure in upcoming blogs.
Until then, I'll stay satisfied with the exposure I already have.

How do you invest in growing economies like China?

My portfolio in the red again for the year, down 1.25%. See it here.

    Friday, July 8, 2011

    When It Comes to Stocks, 'Cheaper' Is Not 'Lower-priced'

    "Apple is too expensive for me."
    This came from a fellow small-money investor a couple weeks back.
    "Expensive how?" I asked.
    The stock was selling for $325 a share, he said. To him, that was simply too much to pay for a share of any stock.
    If he's going to spend $325 on stock, he wants more for his money. Like 30 shares. Or even 50. Even 150.
    It wasn't too long ago that I thought like this, too.
    Separating price from value is a difficult mental hurdle for beginning investors, and one that's not easily cleared.
    Something instinctual seems to tell us that an item selling at a lower price is bound to be a better bargain.
    But when it comes to stocks, this is far from true. And thinking this way will cost you opportunities.
    I learned this on a very forgiving curve. I plunged into investing by Dumpster-diving for stocks after the 2008 crash. Everything was cheap. General Electric, the industrial behemoth now selling at $20, had plunged to under $6 a share.
    To me, it made sense to grab onto some stocks that had fallen the farthest, because they seemed likely to rise the most.
    The method was far from sophisticated, but at the time, it didn't need to be. Everything I bought was a winner. And in many cases, the lower the price, the bigger the gain.
    Safe to say, I got lucky.
    You can't try to evaluate stocks like that in any other situation and expect to be successful.
    That's why it was important for me, like all newer investors, to learn to distinguish between a high-priced share and an "expensive" stock.

    More room for growth?
    Here's something to keep in mind when looking at stock prices.
    A stock always has the ability to rise infinitely. Every stock also has the ability to fall to zero.
    There is no inherently greater risk in buying a stock that's now $500 a share than there is in buying one that's $50.
    Nor is there any inherently greater upside to buying a lower-priced stock. An expensive stock can just keep on appreciating if the company keeps growing. Take a look at the little burrito business, Chipotle, which now commands a $325-per-share price tag.

    Price vs. value
    One of the big determining factors in how much a share sells for is the volume of shares that are available. The more there are for sale, the cheaper the share.
    Think about it like buying beer: Some stocks are priced by the keg. Others are priced by the pony bottle.
    What we're looking for as investors is the best value.
    Let's compare two popular stocks at polar ends, Apple and Sirius Satellite Radio.
    Apple was selling for $325 that day, as I mentioned above. Sirius, for $2.09.
    For every share of stock Apple has available, the company earns nearly $21.
    For every share Sirius has for sale, it earns 4 cents.
    But wait a second ... those Sirius shares are so cheap, all those pennies add up, right?
    Just like those pony bottles can add up to a keg.
    Not quite.
    If you were to buy enough Sirius shares to equal the cost of one share of Apple, those shares would be resting on just $6.25 in earnings. That's less than a third of what Apple's making.
    So, it's more like a pony keg to Apple's full barrel. For the same price.
    The better bargain, and hence the truly cheaper stock, is Apple.

    Go ahead, take a chance
    Is this an argument against buying low-priced stocks? Not at all.
    In fact, I often have a sub-$10 stock in my portfolio, and I've read research showing that they outperform higher-priced stocks in bull markets as a group.
    But this is a reminder to not let yourself get tricked into thinking that low price tag makes a stock a better bargain.
    Usually, there's good reason why those cheap stocks are selling so cheap.

    Do you consider price in your stock purchases? Do you find lower-price shares a lure?

    My portfolio up .57% on the year. See it here.

    Tuesday, July 5, 2011

    July 2011 Portfolio

    Here's a look at my holdings as of July 1.

    The big change over last month was the sale of Timberland, which netted me 73% profit this year (and overall).
    I added to my shares of Apple and Berkshire Hathaway, now my second- and fifth-largest holdings.

    Breaking out the gain or loss for just 2010 gave me a different view of some of my stocks. I had not realized how far National Presto had pulled back. I'm going to give the company another look this week, with an eye on possibly adding to my holdings.

    I might also consider an add to Ford, but it already makes up 14% of my holdings. Not sure if I want to five any one stock that large a piece of my portfolio.

    Any thoughts?