February 2008 Archives (Maybe a Pine Tree)

February 2008 Archives

Ahknaten -- The Mistake I Made

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If you're good at something, stay with what you know best. Stay focused on your discipline. Learn some new stuff, but don't go with the 'flow' just because it is popular.

That is the mistake and the lesson I learned in the past competition. I pick stocks based on a quant method and last year the quants got nailed hard. I got caught up in that as well. A lot of quants follow the same sort of numbers, like: PE, price/book, insider buying, accruals, and short interest. They use a bunch of academic research, but everyone seems to know that research. What amazes me, is how much $$ these people make based on 'sophisticated' strategies, when in reality the strategies aren't so sophisticated. Through the years that strategy had worked well, but something strange happened last year and the models seem to have switched (at least for a little while) and a ton of quant shops got nailed. The longs went down and the shorts went up. Quants got screwed.

I was fed-up, and I saw how people were doing rather well with some high-flying momentum stocks, so I changed my strategy and felt like going along for the ride. It wasn't real money, it was a game, and so I chose stocks that I would normally hate. Some stocks were moving nicely and I tried loading up on them, but I made a mistake of accidentally putting too much $$ into them without taking into account the liquidity. I'm still trying to sell some positions, but the illiquidity hurts me, and I wish I could use the money for other stocks. It was a costly mistake.

If you are playing short term stock games, then a strategy that uses high momentum, risky stocks can work. I could not recommend for real life, but in certain virtual games that can give you great returns or destroy you. I'm sure some behavioral finance professors would love that experiment. They like to analyze the behavior people have with stocks, and if an asset is less 'risky', because 'real' money isn't involved, then what would people buy?

So, I'm going back to my roots and doing what I do best -- quant picks.

And along the way I'll look for 'hot' stocks and I'll make sure to list some reasons why I'd avoid them. There are other stocks besides AAPL and GOOG that I dislike.

Oh. Speaking of Apple. I heard in the news that they have somehow misplaced 1 million I-Phones. 3 million phones were bought and 2 million were activated. Something sounds fishy to me.

Ahknaten -- Ya Microsoft!

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I remember hearing about a Microsoft and Yahoo merger back in May '07, and I thought of the same question -- would they change the name to 'Microsoft!' (with the Yahoooo signature commercial tune)?

In Apr. '07, Yahoo stock fell from $32 to $28. Rumors were circulating that Microsoft would acquire it for $50 billion and the stock shot up to $31.

In Jan. '08, Yahoo fell to $19 after earnings were announced. Shortly after, Microsoft makes a $44.6 billion offer and Yahoo stock rises to $29.

The offer came after Yahoo had a drop both times. The 2nd offer was less than the rumored first offer.
Was Microsoft waiting for the drop before the offer? After all, an offer at a stock price of $19, might be much more appealing than a stock offer at $28? Wouldn't the stockholders be more likely to agree the 2nd time around?

Would you like to hear a strange idea?

Is it possible that Yahoo released bad news, knowing that it would lower the stock price, Microsoft would give another offer, the directors would like it, and shareholders might agree to it? I dunno.

Is it a smart move for Microsoft from a competitive aspect? Perhaps.
Are they paying too much for it? Probably.
Is the internet giant, Google, complaining too much? Probably.

If Google complains and the deal goes through, then it creates competition. Increased competition creates decreased margins for Google and Google's stock drops.

If Google complains and the deal doesn't go through, then the Yahoo stock drops. Yahoo's rich valuation doesn't look as good, which in turn reflects Google's stock, and so Google's stock drops.
So, I think Google is a nice short (but do your own due diligence).

What do I think of the valuation?

Would you like to be an analyst? Just multiply EPS*PE = target price. A lot of analysts do that and talk a lot to justify it. I dislike that method.

I make DCF models using a product called 'eVal', which comes in a textbook by Sloan and Lundholm entitled, 'Equity Valuation and Analysis'. I watch my terminal figures and create a model that matches the EPS estimates from analysts, but I like my valuation models a bit more. When I make the model, I get a target price of $9.

Yahoo is overpriced. Sell. Microsoft is paying too much.
At least it is Microsoft buying Yahoo and not AOL buying Time Warner. If Google was buying Microsoft then I'd surely complain.
Although I think they are paying too much, it looks like Yahoo could help Microsoft's future.
As for Google, the company has a tremendous amount of insider selling. High priced stock, insiders selling. Sell.

Ya - Microsoooo-ooooft !

Ahknaten -- YHOO DRYS

Rating: 3.00 (2 votes) Vote:

Dryships Inc. (DRYS) is a company that I neither hate nor love, but since I dislike giving a 'hold' opinion and I force myself to say 'buy' or 'sell', I'll tell you that I like it. Buy.

Are you curious to know what "real" analysts do? Quite often many are afraid to give 'sell' recommendations. It seems to me, that if the analyst dislikes a stock, they're likely to ignore it rather than saying 'sell'. I'm going to do my best to avoid that mentality.

As you may know, I'm a quant person, so DRYS appeals to me as it has a low PE, price/book, and price/cash flow. But at the same time, I am concerned about the high short interest, high accruals and high F-Score. I find it interesting that in 2006 as the price of oil went up, the stock went down, and then when the price of oil went down, the stock went up. This pattern stopped at the beginning of 2007 as the price of oil went up and DRYS became a hot momentum type stock and DRYS flew from $20 to $120. I need not repeat myself - be careful of HOT MOMENTUM! It plunged from $120 to $50.

Using eVal, and paying attention to my EPS estimates and terminal DCF ratios, I came out with a price target of $125. This is a tricky stock to value, as even the EPS estimates that the analysts give, have a tremendous range. The current price is around $76, so according to that estimate, DRYS is undervalued.

So guess what? I don't love it, I don't hate it, but I actually like DRYS. Buy.

Would you like a few stocks within the same industry?
Long: ACLI, ALEX, DAC. Short: RLOG, SBLK, ULTR

YHOO Update
In my previous blog I complained about the Yahoo deal, and recently YHOO turned it down. Here's my weird prediction: I think YHOO stock will fall in the next year. I think it's overvalued. Sell. Now, once YHOO falls, then I think there is a high probability that MSFT might make another offer on the company, but this time the stock will be trading at a price lower than $19, and the offer will be at least $5 billion less than the other offer they made. Mind you, this prediction is based on the "trend" from the last offer to this offer, but I think it's a neat prediction. Who knows, I might be wrong. If it happens, then it'll be interesting to see what the "unfortunate" YHOO shareholders think then.

Ahknaten - "C" me blog; "C" me run

Rating: 2.00 (2 votes) Vote:

Sell Citigroup (C). The "C" almost looks like a copyright when I write it like that. I have never held 'C' in my virtual portfolios. Using my standard DCF type analysis, I ran a valuation of "C" and got a target of $39. So from that perspective I like it, but I avoid it as the PE is high, accruals are high, the debt/equity is super high, and the F-Score is high. To me, the valuation story is only partially there and the quality story is not there. So, I can't seem to find a strong compelling reason to hold it. Perhaps that avoidance has paid off for me, as I was able to avoid the 50% plunge. Did the F-Score help me avoid that one, perhaps? Plus, I find other companies in the financial sector much more appealing. I'm bullish on financials, but in particular I'm bullish on insurance. A lot of attention goes to the large banks, but don't forget the insurance companies. They seem to have nice earnings, quality, valuation, and that sort of stuff, and the government steps in at times when major disasters occur. In fact, my virtual financial portfolio at Marketocracy has 95% in insurance and my diversified portfolio at Marketocracy has about 46% in financials, of which 100% is in insurance. The portfolio in this competition has about 15% in financials, but I keep it low on purpose as the holdings in the other portfolios are meant for longer terms. Sell "C", buy insurance.

As for "C", check on the "C" restaurant in Vancouver, BC. It's certainly one of my favorite restaurants in Canada, and they have some awesome food, great service, and sweet times.
http://www.crestaurant.com/

Ahknaten -- Crocodile Weight Loss (CROX and NTRI)

Rating: 2.00 (1 votes) Vote:

Sorry that I constantly bash stocks, but I dislike CROX and NTRI. Sell.

Why must people always ask about momentum companies that have fallen like people figure skating uphill? (Thanks Blade) My valuation gives NTRI a target price of $12, and with the high short interest and high F-score, I'll avoid this one. Sell it. I'm not one to look at analyst reports as I try to come up with my own ideas, but I heard something that made me laugh and I think it's a good comment. In a Broadpoint Capital report they stated, "Having a Buy rating on this stock has been much like having a javelin through our head". I would certainly agree. Note to Broadpoint -- check out F-scores, you may have avoided it in the first place.

CROX has acted like a biotech company, instead of a footwear company. Be careful of 'fads', and be careful of 'fad' stocks that act like technology stocks. This was a momentum and story stock that folks piled up on. I remember hearing stock pitches when it was at $70. *sigh*. I'm glad I avoided that 'hype'. The insiders were selling it as it was heading higher. Oh dear analysts, don't you see such things? Why must you constantly play the hype and keep pitching such stocks? Now, CROX has enjoyed a much needed correction and I am happier. If you wanted a small 'bull' story for the stock, one could mention that the insiders haven't sold it lately. Lack of recent insider selling is a good thing, but I'm concerned with the short interest, previous insider selling, high price to cash flow, a very high F-score, high accruals and I get a target price of $24. I read on a blog about how one should buy this stock based on the chart. Oh please, if a stock falls, there is no guarantee that it will come back up. Avoid this one, pick up a copy of Backpacker magazine, read the reviews on hiking shoes and buy something else instead.

Oh man, if I could figure out how to include charts on the blog, I'd show a neat chart of CROX, with special thanks to Factset. Take a chart of CROX and line up the insider selling with it, it sure makes an interesting chart. The insiders were rather 'smart'.

Ahknaten - Me versus Them - Who will win the Strategy Lab?

Rating: 2.80 (5 votes) Vote:

I thought it would be a fun exercise to critique some of the stocks chosen by those in the Strategy Lab Open, and provide a bit more insight as to why I chose the stocks that I chose. I'm certainly not trying to be arrogant or cocky by doing this, I'm just having a bit of fun. I like stocks that demonstrate a variety of stories. If the stock has a value story (low PE, price/book), a quant story (low F-Score), a quality story (low accruals), a momentum story (earnings momentum), a smart money story (low short interest, insider buying), and a growth story (some growth), then I probably like the stock. As such, I think the stock could appeal to a wide range of funds, and hopefully that will drive the stock price up. For now, I'm not going to bother you with creating 'stories' for the stocks I like, as those are the basic stats I look at. Now, for fun, I'm going to follow that methodology and pick apart the Strategy Lab portfolios.

Here are my predictions as to who I think will win the competition.

1st - High IQ
2nd - Guru Investor
3rd - All Star Team
4th - CAPS Commando
5th - The Amateur
6th - Dog Pound

A few thoughts on each contestant and the stocks I like/dislike:

6th place
Robert Walberg -- Dog Pound
Best stock: GOOG
Worst stock: BWLD

The stocks chosen for this portfolio have a strong tilt towards the discretionary 'hot stocks', and many of them have insider selling, high short interest, and a high price/book. Although I dislike GOOG (short it), out of the stocks listed, I liked it the most. BWLD (along with BUD) is one of those 'hot' stocks that students love to ask me about. No offense, but the portfolio is composed of a lot of 'story stocks', that I could talk to the average Joe about and increase blog hits, but my bet is that this portfolio will stay in the dog pound. LVS is one of the stocks in my torpedo list at Earnings Torpedo. Sorry, you get 6th place.

5th place
Vad Yazvinski -- The Amateur
Best stock: CEL
Worst stock: HYTM (but, he's shorting it, so I'm happy)

The stocks chosen for this diversified portfolio follow a creative blend of ETFs, shorting and thought-provoking articles. The portfolio is short on Mortgage Finance and Homebuilding, and long on Oil & Gas Drilling and Israeli wireless companies. Vad, you're a nice guy and I'm happy you won the last competition, but I'm going to bet 5th place for you. I'm sorry. If I hadn't taken into account some of the shorts you chose, then I would have given you 3rd place. My concern lies with some of the shorts, as there are some with a low PE, low price/book, low price/cash flow, positive growth, and insider buying and low short interest. Take a closer look at those -- I haven't, and perhaps you're right, but that's where my concern lies. It is nice to see that you're shorting LNG, LEV and WAVE -- I have listed those at Earnings Torpedo as well. I'll give you 5th place.

4th place
Russell Carpenter -- CAPS Commando
Best stock: CVD
Worst stock: LUFK

This portfolio is following a strategy of picking ETFs, and it's rather boring if you ask me. Good grief, I feel like Simon Cowell. It would be nice to see a bit more stock picking, but instead I feel like your portfolio is pretty much an index fund, boring. This portfolio is most likely to coast along with the market. Watch the insider selling on LUFK, in the past two years they have been pretty good at timing their sales. I'll give you 4th place.

3rd place
Ken Kam -- All Star Team
Best stock: VLO
Worst stock: GROW

Mr. Ken Kam, although I disagree a few times with your stock ideas (my opposition to AAPL is well noted), I admire that you choose stocks based on a variety of strategies. So although I might not like something, it doesn't mean I'm right, and you can certainly tap into that talented pool of individuals who specialize in what they do. As such, my respect for Marketocracy (and MOFQX) has grown. That being said, I need to be a bit critical and you might be surprised that AAPL is not the least favorite of the stocks you chose, but that distinction would apply to GROW. I'd recommend shorting that stock and picking up an insurance company instead. There is one positive bit of news to GROW -- recently some insiders bought it at under $16. So perhaps you might be right? As for VLO, I like it. Buy VLO, short GROW. I'll give you 3rd place.

2nd place
John Reese -- Guru Investor
Best stock: E
Worst stock: BEZ

If any portfolio in this list follows my passion for quant work and challenges me the most, it's this one. The stocks chosen for John's portfolio follow a variety of known quant styles. It's fun stuff and it's nice to see this portfolio in the competition. Out of all the competitors, I think this one is my hardest competitor; both of us are up about 7-8%. Perhaps quant investing is back in style? I find it most fascinating that one of the stocks chosen in his portfolio is Factset (FDS). FDS an excellent company that provides awesome quant tools and this sort of portfolio is rather easy to compile using Factset. Its possible FDS came out in one of his screens, but I would wonder if there was any bias in choosing it for a stock pick? As for the other stocks, I'm concerned with the overweighting on highly shorted discretionary stocks. That move might hurt you? I'll give you 2nd place (I'll take 1st).

1st place
Kelley Wright -- High IQ
Best stock: NKE
Worst stock: SBCF

Congrats Kelley. This diversified portfolio seems to choose stocks that have a low PE, price/book, price cash flow and short interest, with some growth that can help the stocks avoid a 'value trap'. It has also stayed away from some of the 'story', 'hot' stocks that I complain about. I wish it would have some telecom and energy stocks, and some foreign companies, but overall it's a nice portfolio. Kick out SBCF and choose another insurance company, pick an international wireless company for international exposure and throw in some energy stock to help lower your risk. Watch the insider selling on NKE. Congrats Kelley, I'll give you 1st place.

Short the dog pound, go long on High IQ and use CAPS Commando as the index.
Best of luck to all, and I hope I've entertained you a bit.
Amateur, keep it up with the shorting.
Guru Investor, the game is on, and I'll borrow your title after this is over.

Please note, in the spirit of competition, it's somewhat fun to be a bit critical of one another and kid around -- I'm really not trying to be a jerk.

Ahknaten - SIRI ously Losing My Patience and Other 'Hot' Stocks

Rating: 3.00 (2 votes) Vote:

Sell SIRI. On Apr. 21st, '05, Forbes had an article called 'Wolverine Shorts', and in that article I disliked SIRI. On that day it closed at $5.14 and has since dropped -43% to $2.93. In my virtual short fund on Marketocracy, I shorted SIRI in Feb. '05 at $5.95 and then covered it on Oct. 31st '06 at $3.83. I had covered it as I had found better stocks to short, but I still dislike it today. SIRI has had 10 years without having a positive EPS and so my patience has run out. I'll break SIRI down into a few categories that I like to follow.

Value story? No.
It has a poor PE, price/book, price/cash flow. I made a valuation model of it, and even with aggressive nice estimates, I still get a target price <$0. I read somewhere that someone has maintained their target price of $20 during the past few years, and I have to ask with some polite criticism, 'are you rational'? Have you held that same price target the entire time? Do you still have that target price, or have you adjusted it with respect to current conditions? Short.

Quality story? Yes.
The company does not have high accruals. It could be a good stock for those who like low accruals. Long.

Smart money story? No.
The insiders have been selling the stock and even though it is under $5, it still has a high short interest. Short.

Momentum story? Yes.
Earnings have improved, and although they're not positive, SIRI could appeal to some momentum funds. Long.

Growth story? No. Short.
You might be surprised that I would say 'no' to a stock with high sales growth. But when you have high sales growth like this, I actually dislike it, especially if you're not making a profit. Sorry, the growth story doesn't work for me. Remember, if a stock has high sales growth, it has to slow down at some point, and when it does, it can hurt. Many analysts take the high sales growth and create forecasting models, but many also forget to lower those growth estimates as time goes on, and if growth slows down and the valuation story isn't there, then the stock has a poor value/growth story going for it. Short.

Looking at that breakdown, I get a 3 No's and 2 Yes's, and that tells me - Sell.

Would you like to be a 'hot' analyst?

Why do we keep hearing about stocks like SIRI? It's quite simple. People like to hear about companies they 'understand' and 'recognize', and they like to hear about 'hot' stocks. These are the stocks that drive blog hits and news headlines, and they're easier to promote to clients, but they're not necessarily the best stocks to buy. Think about it, if everyone is talking about it, don't you think it's too late to buy? So for fun, I made a very simple screen on Factset (awesome software) and limited it down to stocks that people 'easily understood'; in other words, I found 'discretionary', US-based stocks with a market cap over 500 million, and then sorted them by 1 year sales growth. It's an incredibly easy screen to make. Guess what stocks you get from that screen? These will be the stocks that you hear people talk about and make the news, and you'll hear funds talk about them to increase their marketing and assets under management. These are the stocks that generally have quite a lot of analysts and those analysts will compete against one another at having the highest price target. Some of those analysts take very aggressive estimates on their terminal values in their DCF models (if they even make one) and come up with silly price targets. Then, if your valuation doesn't look great, since you're required to write a report about it for press, pick a stock price that looks to be "within reason" of current high/low prices, make a story out of it, and you'll get a 'technical-not-too-academic' price between $2.50 and $4.00. This is the 'hot' stuff, and as I've said before - avoid it! Find 'boring, buy low' stocks and then 'sell high, hot' stocks. So what are the "hot" stocks on that very simple screen that I made? CROX, ICON, NTRI, SIRI, NCMI, VMED, WYNN, RHD, LULU, CKXE, GRMN, GME, TRYB, XMSR, PENN. Guess what? We've already heard three of the top 4 stocks in the blogs, and I'm quite sure we'll hear more about the others later on. You can be just like some analysts and pick one of those stocks and a high price target and blog away. You might just get noticed, and I'll be ready to write another blog like this.

Maybe a Pine Tree

ahknaten

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