On fundamentals, the stock looks cheap at just under $180 per share, but all the turmoil involved in valuing financial assets makes reported book values questionable and earnings estimates suspect at best. That said, we don't have much else to value the stock on. We've also just had a bit of a run-up in financials and the stock has traded as low as 142 in the past month. GS pays a dividend yielding 0.8%.

I don't think we've seen the last of bad news in the financials, so I wouldn't buy GS here. A pull back to somewhere in the 150's or 140's on the next piece of bad news would be the time to buy some. If I owned it here, I'd hold on, but be tempted to lighten up if it goes much higher, then look to buy it back cheaper.

I've been playing with WFC in SLO with some success - actually have a gain in it from start of SLO1 - and believe the same trading or accumulation approach could be used for Goldman Sachs. Take advantage of bad news to add to positions, use good news to lighten up; repeat. This approach should only be used on solid companies or you run a high risk of holding the company that's at the center of the bad news, e.g. BSC. Owning strong companies minimizes that risk, but doesn't eliminate it. GS certainly qualifies as a strong company.

There's still quite a bit of risk here. GS has a leveraged balance sheet and Bear Stearns showed just how fast book value can be shredded when leverage works against you. The Fed showed us that they're willing to intervene to keep companies solvent, but that doesn't mean shareholders have any protection - just ask Joe Lewis. Even at the sweetened JPM offer price, BSC's shareholders took massive losses.

In short, GS looks attractive. But, patient buyers are likely to get a better price than Monday's close.

Comments: View Comments |  Tuesday March 25, 2008  |  Stocks: gs,

Most of us have lost money in the game, but that only tells part of the story in a market where, as of the 14 Mar close, the S&P 500 has lost over 6.5% since its close on 31 Jan. For the longer term players, the S&P 500 is down 11.7% since the 27 Jul 2007 close - the last close before we started playing.

For the folks who started playing this round, any Mar 14 closing fund value over $934,416.60 is ahead of the benchmark used by most mutual fund managers. For those playing in the long term category, if your fund value is over $882,922.65, you're doing well.

I copied the leaderboard from the main SLO page and the standings from Marketocracy into a spreadsheet and tried to make some sense out all the numbers. As most have observed, the leaderboard numbers are suspect and most players are buried in the stats under the people who apparently have opted not to play. All the following analysis is as of the 13 March close since that was the most recent update for both listings.

Sidebar on leaderboard stats: The leaderboard shows the correct account value for me, but shows my return for the current round as -3.75%. Comparing the Marketocracy ledger values from 13 Mar and 31 Jan, I get +.04%. It's safe to assume the return stats for others also have errors.

First, I tried to weed out the non-players. My assumption was that everyone with identical fund values just under a million dollars was probably not playing. Since the leaderboard is the only listing with fund values, I sorted that. Somewhat surprising, there are two large groups clustered at fund values of $998,877.33 and $998,849.96. The difference between those two numbers would match a one-day delta in the starting point for the funds. Not sure if that's what happened, but it would be nice if we all had a consistent start point. Dropping all the players with those exact fund values out leaves only 271 of us actually competing. The Marketocracy stats show 3 and 6-month return data, by sorting on that and assuming that the only the long term players would have 6 month data, I came up with 191 players that started with SLO2; 80 continued playing their SLO1 portfolios.

As of 13 March, the S&P 500 benchmarks equate to $954,249.03 for SLO2 and $901,662.15 for the longer term accounts. Among the 191 active players who started fresh with SLO2, 124 (65%) are beating the S&P. For the longer term, 53 of 80 (66%) are ahead of the benchmark. Keep in mind that includes Marketocracy's management fees and very low cash interest rates. When many studies show that something like 75 or 80% of mutual fund managers don't beat their benchmarks, I'd say that as a group we're doing pretty well.

What I think this clearly shows is that individual investors can hold their own in the financial market if they're willing to spend some time researching investments and managing their portfolios. Better access to earnings estimates, conference calls and other information combined with very low or free commission brokerage accounts go a long way toward tipping the balance from mutual funds to self-managed portfolios.

A smart MBA student could probably come up with a good research paper using the SLO contests and developing some theories and trends on the pros and cons of self-directed portfolios vs. funds for individual investors.

Thanks for reading and questions or comments are welcome.

Comments: View Comments |  Saturday March 15, 2008

Rather than chime in on the QOTW this week, I thought I'd pull a thread highlighted in Uncle John's Cabin. John reminded us to look at the companies that are suppliers to the big name trend stocks, his pick was a supplier to the mining industry, Bucyrus.

Bucyrus and Joy Global are busy building heavy mining equipment. China is reported to be building a power plant every week. Single hull oil tankers are being phased out and shipyard order books for double hull ships are full. Order books for new offshore drill rigs are full several years out. Deere is building tractors. Rail car manufacturers are building tank cars to transport ethanol. Tata Motors recently announced a new, inexpensive car for the world's new middle class.

Pulling the thread for many of the current strong areas of the economy leads to a common material - steel. And the world's biggest steel company is ArcelorMittal (MT). With a market cap of over $100 billion, MT may be the biggest company you won't hear about around the coffee pot at work. MT looks cheap based on most valuation metrics. Forward PE is 9.24, margins seem good - operating margin of 14.5%, profit margin of 9.85%. But, analysts' earnings growth rate estimate over the next 5-years is only 4.1%. MT plans to return 30% of earnings to shareholders in the form of dividends and stock buybacks. The planned dividend for 2008 is US $1.50 paid in four quarterly installments of .375. The remainder of the earnings returned to shareholders will be in the form of stock buybacks. Luxembourg withholds a 15% dividend tax on the payout; I'm not sure how that gets treated in a taxable US account, but believe there's no way to recoup it if you hold the shares in an IRA account.

There's a lot to like about ArcelorMittal, but the shares look slightly over valued based on the low earnings growth estimates. In order to consider buying this stock, there would need to be a good case for why the analysts' growth predictions were too low. About the only argument I could come up with for that would be that earnings from around the world will look much better when translated into falling dollars. It's probably worth investigating the steel sector further for better buys. A quick glance at Yahoo's stats page shows US Steel (X) trading at a slightly higher forward PE of 10.17 and a significantly higher 5-year earnings growth estimate of 9.67%.

I don't think MT will be a big money loser for its investors, but to buy you would need to come up with a convincing argument for why earnings growth will be better than the estimates. Demand growth from China, India and other developing markets could provide that story, but it's fair to assume analysts have that in their models. In this case, it looks like I tried to follow the supplier thread a little too far.

Feel free to add your opinion of MT. Is the infrastructure build-out supporting steel demand still going strong or is it topping out?

Disclosure: At time of posting, I don't have a position in any stock mentioned in this blog entry.

Comments: View Comments |  Sunday March 9, 2008

SIRI just issued an annual report, so there's some fairly current financial data - and it doesn't look promising to me.

The balance sheet is, um, ugly.

Long-term debt stands at about $1.3 billion. That's a lot of interest headwind to fight when you're trying to make it to profitability. For 2007, the loss from operations was $513 million and net loss was $565 million. Book value is negative.

Current liabilities are about $1 billion, current assets are about $680 million. Uhh-oh - someone's going to be tapping the credit line and adding to that debt to pay the bills.

About the only good news is that subscribers and revenues have been increasing rapidly. But so has the cost of revenue. To have any hope, they need to keep subscriber revenues climbing and get cost of revenue under control. As some other posters have mentioned, I'd be very concerned with maintaining subscriber growth in a slowing economy. A satellite radio subscription just isn't going to be a high priority if people have to tighten budgets for higher gas bills, groceries, higher taxes, etc. Between XMSR and SIRI, there are something like 17 or 18 million subscribers. Probably a fair amount of subscriber growth left, but just how many people are going to pay for satellite radio when they can get broadcast for free?

But, what if the deal gets approved. XMSR to the rescue right? Not so fast. Over the last four quarters XMSR has only had a little over 10% revenue growth; losses have been shrinking but analysts are still estimating losses. Their balance sheet is in pretty much the same shape as SIRI's.

So, if you own SIRI and the deal goes through, you'll end up with stock in XMSR. And two companies with lots of debt, the same basic business model and plenty of losses for the foreseeable future become one bigger company with the same characteristics. Then you get to hope they can hang on until subscriber revenue growth outstrips costs.

It looks like both of these companies will need to continue taping credit lines to raise the cash to keep going. Before buying the stock, ask yourself - In today's credit market, would you lend either company money?

Maybe it spikes up if there's good news on the merger or something. If you want to gamble, fine. But if you're looking for investments, there are better alternatives covered in blogs here every day.

Comments: View Comments |  Saturday March 1, 2008