2011 May | The Market Capitalist

Yellow Media Up Against A Rising Tide

Posted on May 31, 2011 by Dominico Johnston Posted in Investing, News, Opinion, Risk Leave a comment

Recently the rumor mill has been quite unkind to Yellow Media (YLO.TO / YLWPF.PK). For some reason, rumors have sparked that a deal announced a few months ago where the company will sell off its Trader.com operations, might be in some rough waters. Where the rumor came from, I am unable to find out, but it is being held as one of the explanations as to why the stock has been rocked lately.

Besides all the problems the company has run into recently, which you can read in an article titled,Yellow Media tries to reassure nervous investors, I’d like to discuss a common topic on this blog; trends.

A forward looking market is going to take into account what it sees and/or perceives on the horizon. What lies ahead? As we all know a shift away from using yellow page directory books has been in place for over 10 years now. With more people using the Internet and having it in more places (phone) makes yellow pages directories obsolete. A percentage of the population will still turn to this service because they do not rely on the Internet and, above all else, everyone still receives the directory at their house, which means it could possibly be used.

Being ‘available’ is a very big thing in the yellow page directory world. How does a sales agent justify an advertisement in such a directory? One of the major selling points is that every house that has phone service is going to receive an annual edition of the directory. This ensures that even though usage might be dropping, at least distribution is not.

Recently the city of San Francisco may have accelerated the trend away from yellow page directory services. Last week it enacted an opt-in law for city residents wishing to receive a yellow page directory book. If you want one, you’ll need to ask for one. Other cities have passed opt-out ordancinces, but that took effort on the part of the household to actually state they did not want a copy. The opt-in law places the demand driver on the user. If he or she doesn’t act, the yellow pages doesn’t come.

If this trend catches on it will be devastating for a company like Yellow Media. Even though the company has been proactive in moving its business online, it still depends on its hard copy yellow pages revenue to make its current business model function. The transition to online sales is in process, but it going to take years to ramp up. Turning a large ship in an opposite direction is not always the fastest endeavor.

Previously I expressed my bullish views about Yellow Media given their dividend yield and online business growth. The current inhospitable climate climate for yellow page distribution is making me rethink my original stance. It’s not easy to catch a falling knife without being cut. Yellow Media is a falling knife and I do not know where it will stop. Until the company is able to generate positive news that changes investor sentiment, I am of the opinion that it is better for investors to look and not touch. It’s okay to take a stance on the sidelines.

Disclosure: No Position

Rising Interest Rates, the Dollar and Gold

Posted on May 30, 2011 by Dominico Johnston Posted in Inflation, Interest Rates, Investing, Opinion, Risk, Speculation, Strategy 2 Comments

For nearly a year and half now many foreign countries (mainly developing countries, but Australia is in the mix) have been increasing interest rates and increasing reserve requirements. This summer the Federal Reserve’s Quantitative Easing II will be ending. A national election is upcoming in 2012. As usual, a number of events are happening and are upcoming that can impact the performance of your portfolio.

I’m not much for big predictions, but I think it’s a good idea to at least think about shifts in trends and how such shift could impact your investing game plan. Bear with me as I shoot off a few random thoughts…

What happens when the Fed finally starts to increase interest rates? It’s bound to happen some day soon, right? Free money (or nearly) can’t exist in perpetuity. At least I don’t think so. When rates begin to increase, what will that do for the dollar? I suppose if every other country in the world is doing the same (increasing rates), then it’s a wash, but that sounds like some type of text book situation.

If we hold that the recovery continues, will we come out stronger that Europe? If so, does this mean that the dollar begins to regain some of its strength?

What if Washington gets the deficit under control and drives the current account deficit down? That would be a positive catalyst for the dollar. I think we could agree that the public sentiment wants deficit spending reduced, but will current and/or future politicians have the will to do so?

In the case that the dollar gets stronger, what does that mean for commodities? What does it mean for precious metals? Gold is driven up right now based on anxiety and fear. Increased faith in ‘the system’ would presumably cause investors to migrate away from gold. Other commodities might be hit as well. Oil is priced in dollars and therefore a stronger dollar would lead to lower oil prices, all else being equal.

Questions like those above are good for any investor to consider. Right now it’s hard to think about a strong dollar bull run, but if it does occur is your portfolio ready? If not, what type of plan can you devise to act accordingly? No one wants get caught unprepared.

Hot IPOs in Perspective

Posted on May 28, 2011 by Dominico Johnston Posted in Investing, News, Opinion, Risk, Speculation, Stock Ownership, Strategy 1 Comment

Hype surrounds a hot offering, such as LinkedIn, and the details of the ensuing months are covered more episodically. Folks move on to the next hot IPO — last week, a Russian Internet company, Yandex (“The Russian Google“), grabbed headlines with a hot offering. Its shares soared 40% on opening day…READ MORE.

My Take: The linked article does a great job of giving a brief real world example of market hype and what happens when the ‘tide turns.’ I like how the author points out that post-IPO inside investors are locked into their positions for 6 months. Being that the insiders often control a sizable amount of shares outstanding, the stock can certainly bet set for a dip once these investors have the ability to sell their shares.

The main takeaway I get from reading such an article is if you’re going to invest in areas where there is a lot of media buzz or the company/sector is seen as trendy, then you need to have a clear exit strategy. This doesn’t mean you need to completely exit the position, but can you set price points in which you sell part of your position? You don’t have to be either 100% right or wrong to be a successful investor.

Low Initial Investment + Frequent Trading = A Disaster

Posted on May 27, 2011 by Dominico Johnston Posted in Investing, Risk, Strategy 2 Comments

Low Initial Investment + Frequent Trading = A Disaster

As you might be aware, I’m not a high frequency trader. I have my positions. I try to stay in the positions for at least a year. I’ll take a profit (or take a loss) if appreciation and circumstance seems right.

Trading with little money is destined to lead to failure. I don’t need experience to teach me this lesson, just a simple understanding of trading fees, the tax code and a sense of reasonable expectations.

An example will be the most effective way to communicate this point.

Let’s say I have an account with $1,000 and I want to put $270 on a stock that I think has a lot of potential to increase in value within the next year. My trading account charges $7 per trade.

If my purchase price is $6 per share, I can buy 45 shares for $270 (270/6 = 45 shares). My trading expense will be $7, which will equate to 2.6% of the value of my investment. I now have my 45 share investment and I’ve spent $277 of my account’s funds.

A few months pass and the investment I have is now selling for $8.50. I decide to sell. I thus have made a $2.50 profit per share, which equates to $112.50 increase in my account’s value (45 shares * $2.50 = $112.50). I incur another trading fee of $7 from this trade.

Where do I stand after making this trade?

My gain from the stock = $112.50 or +41.7% from my initial investment of $270. The trade was within a year, so I’m going to have the gain taxed at the rate at which my income is taxed. For sake of example, let’s say it’s 30%.

$112.50 * 30% = $33.75 taxes to be paid.

I’ve also incurred $14 in trading fees.

$112.50 – ($33.75 + $14.00) = $64.75 after tax and commission profit.

$64.75/$112.50 = 57.5%…Of the dollar value gain I booked, only 57.5% of that is actually mine to keep as profit. Nearly half of the value of my return has been taken away.

If we divided $64.75 by $270, we see that the ROI is now slightly less than 24%.

The fact that your initial investment is so small makes your margin for error extremely thin. The $14 trading fee incurred from entry and exit is so significant that you get hit from both sides when trading. Your trading fee takes a chunk and taxes take another larger chunk of your money.

In this example we saw an impressive short-term gain nearly cut in half from trading fees and taxes. If the return was less on the investment it would have been even worse.

Being a successful trader is a steep enough task, it does not need the additional burden of a minuscule initial investment.

Buying Good Companies on Corrections

Posted on May 26, 2011 by Dominico Johnston Posted in Investing, Strategy 4 Comments

One of the more difficult tasks when investing is determining an entry point. You don’t want to buy a stock when it’s near its all time high, yet you don’t want to miss a solid run up in the stock’s price. If you have a list of potential buys, then you can probably reduce the chances of you either making a bad decision or being stuck in investor paralysis.

Having a list of stocks you’d like to buy will help you not fixate on one stock. If everything depends on one stock, then you lose control. You put yourself in a position where you live or die by what happens. This will surely force your hand and make you enter at a time when you’re uncertain. Options enable investment flexibility.

When you craft a list of stocks you’d buy, you provide your mind with options. You don’t trap yourself into a corner. If one stock has went on a run and you think it’s gone up far too much, you can look elsewhere. When you have options you can pick your shots.

One way to pick your shots is to look for companies with a proven track record, that are financially sound and are producing product or services that people demand and will continue to demand in the future. Consider John Deere (DE). DE is a leader in farm-agriculture equipment. It’s the gold standard in tractors. People throughout the world need such equipment because people continue to want to eat. It’s a strong and viable company with solid growth prospects in the future.

DE recently came about 20 cents from hitting $100 per share. It has now dropped back into the mid-80′s. You’re seeing a correction happen in the stock. Investors are taking profits, people are reallocating their holdings. Over a 15% drop in the price of the company has occurred.

If you had a your wish list of stocks and DE was on that list, the recent pull-back in price might pose a good opportunity for you to establish a position. You’d obviously want to look at the company and the macro environment, but you’d be able to pick your spot.

The bottom line is that you should not become over-infatuated with one stock. You’re the master, not the stock.

Momentum Play? Mobile & Social Gaming

Posted on May 25, 2011 by Dominico Johnston Posted in Investing, News, Risk, Speculation, Stock Picks, Valuation Leave a comment

I’d like to say that “We live in interesting times,” but I’m pretty sure almost everyone throughout history has made such a statement. Either way, the strength of investor sentiment towards anything tied into social media is an interesting phenomena. Is the social/mobile revolution going to live up to the hype?

Based on LinkedIn’s valuation, it appears that many in the market believe that we are yet to grasp the full implications of social media. Maybe they’re right or maybe they’re wrong. Either way, the general sentiment/momentum of the market currently is toward the darlings of the social/mobile revolution.

Upon today’s news release that popular social/mobile game developer Zynga is going to file paperwork for an IPO in the near future, Glu Mobile (GLUU) popped by over 21%. (If you are unfamiliar with social/mobile game developer GLUU, I would recommend you visiting a post in which I recommended the stock back in January 2011.)

If the Zynga IPO behaves as the LinkedIn IPO did, doubling from its set IPO price on the first day, then GLUU will certainly feel the tailwinds of Zynga. We saw from the news today how strong those tailwinds can be.

Secondly, last week when LinkedIn came charging out of the gates, QuePasa (QPSA) caught a nice tailwind from the LinkedIn IPO and ran up over 30% at one point on the day. QPSA is a social networking companythat targets Spanish and Portuguese speaking countries. What most people do not know is that they are also a social media game company.

QPSA’s primary social media game offering is titled Wonderful City and is available via www.QuePasa.com or www.Okut.com (a social media site owned by Google). Based on current user figures, the game Wonderful City has between .8-.9 million users/players between the two networks. The game was released a few weeks ago. Based on current growth rates, it should hit 1 million players by early next week. The company also plans to offer the game to Facebook users in the near future.

If you’re an investor that is willing to take on a decent amount of risk, I would monitor news about the upcoming Zynga IPO filing and any press releases that tout game growth from either GLUU, QPSA or other social/mobile game companies. Social media and online gaming have been very hot areas in the market since the beginning of the year.

Disclosure: Long QPSA

Risk Matters When Measuring Performance

Posted on May 23, 2011 by Dominico Johnston Posted in Investing, Risk, Speculation, Stock Ownership Leave a comment

In my last post I briefly discussed Jensen’s Alpha and used a real world example to examine if an investment was actually outperforming the market. The key in model was not only looking at stock return vs market return, but considering how much additional or less risk was taken on to achieve the stock’s return. This is a VERY important factor that most individual investors overlook. Risk matters.

I’m stressing that risk matters because I often frequent sites that promote annual subscriptions to trading services or newsletters. In their pitches they often hype how you are going to be able to double or triple your money in the next X months by subscribing. Most of the time they do not include a guide to their past performance and they most certainly never provide any hard performance measurements like Jensen’s Alpha.

I am of the opinion that if you’re intrusting someone with your money, whether it’s directly through an adviser’s services or loosely through some form of stock picking newsletter, you should be able to get a clear sense of how the investments they’ve selected in the past X months or X years have performed against the market.

The reason I am so adamant about the importance of including a measure of risk taken to achieve the return is twofold. First, many investors have no quantitative idea of how much risk above or below the market they’re taking with their portfolio holdings. Putting a number to risk in relation to the overall market can tell an investor a lot about what he or she is putting on the line. If they are already risk adverse to the market in general and their portfolio is showing 50% more risk than the market, then they need to be aware of this fact.

Secondly, quoting better returns than the market without divulging the risk profile of the portfolio is a convenient way to make yourself look good. If I took on 70% more risk than the market to beat the market by 10%, then I have a pretty good indication that I’m not actually the all-star investor that some may think. With such risk, it would not be out of the question for the investments to rapidly turn course and be 10% below the market within a matter of days.

If you’re confiding in a service or a person for your investments, ask them how much risk is being taken compared to the market the next time performance is discussed. If you have your own portfolio, make a habit to regularly measure your performance against the market and the amount of risk taken.

For more information, watch my video blogs below:

How Can You Tell If You’re Beating the Market?

Posted on May 22, 2011 by Dominico Johnston Posted in Investing, Risk, Valuation 2 Comments

I’m a big fan of actually taking a look at a stock or portfolio of stocks and seeing how they’ve performed against a model that takes into account risk and expected return. Jensen’s Alpha is a tool that will do that for us (one of many). It will enable us to see if our portfolio has outperformed the market by specifically gauging the amount of risk we took on to get the return we’ve received.

To illustrate the practical application of Jensen’s Alpha, I’m going to look back at the first stock I recommended via this site. In early July 2010 I wrote a post that first appeared on the Div-Net investment site arguing that Telefonica (TEF) was a buy. (Note – Since the time of the post TEF has split, so the price quoted in the original post needs to be adjusted.)

For the sake of this example, let’s assume a year has passed and we’re doing an annual review of this investment.

The Jensen’s Alpha formual is as follows….

= Portfolio Return – [Risk-free return + (Market Return - Risk-free Return) * Beta]

= 34.47% – [1.0% + (32.15% - 1.0%) *.97]

= 34.47% – 31.22%

=3.25%

What the number above means if that holding TEF from 7/2/10 – 5/20/11 would have provided the investor with superior returns to the market (S&P 500). Your investment would have outperformed the market in absolute terms with volatility factored into the measurement.

Here is how I received my inputs for the calculation above…

Risk Free Return = 1% (I’m using what I could expect to get from the best liquid savings account from a bank)

Market Return =1,333.27 (S&P on 5/20/11) – 1,022.58 (S&P on 7/2/10) = 310.69

310.69/1,022.58 = 30.38%
(.602+.653+.553)/102.2 = 1.77% (I’m using the SPDR S&P 500 ETF as a proxy for the dividend yield calculation…3 dividend payments have been distributed since July 2nd)
Total return = 30.38% + 1.77% = 32.15%

Beta =.97 (This beta figure compares TEF’s volatility against the S&P 500 over the past 5 years (obtained from Yahoo Finance)…The .97 measurement means that over 5 years the stock’s price, on average, has moved almost in sync with the S&P.)

To properly do this calculation I should construct Beta on my own for the specific time period in question, but I’m too lazy.

Portfolio Return = 23.77 (Price on 5/20/11) – 19.15 (Price on 7/2/10) = +4.62

4.62/19.15 = 24.13% (Return from the stock’s price appreciation)
(.8983 + 1.082)/19.15 = 10.34% (I’m adding the dividends paid on 11/3/10 and 5/3/10 to factor in Return on Investment based on dividend payments)
Total return = 24.13% + 10.34% = 34.47%

Seasonal Market Trends

Posted on May 21, 2011 by Dominico Johnston Posted in Investing, Strategy 1 Comment

For some reason, and maybe it’s just me, I’m hearing the saying “Sell in May and go away” a lot this month. It’s not that people don’t repeat the saying in May, it’s just that I’ve heard it a lot lately. The saying refers to investors that drop their positions for the summer and then return sometime in the fall (or late summer).

As an investor it’s good to have some general knowledge about season investing trends. Maybe you’re not going to build your investment strategy around some devised seasonal timing structure, but if might give you some guidance as to when to lighten or add to your portfolio when all else is equal.

As you can see from the chart below, if history is consistent investors should buy in September or October and ride out the rest of year into January. The problem is the chart is looking at averages, so you may get burnt…no guarantees.

I went ahead and created my own chart of annual movements in the S&P 500 from 2004-2010. As you will see, through those 6 years the idea of being able to buy low in September really hasn’t worked out. What you do see though is that the summer months appear to be pretty mushy. The fall and winter months seem to be pretty strong. In 2009 this obviously wasn’t the case because the market tanked…

Click to Enlarge

The biggest take away from the discussion of seasonal investing is that it is helpful as a general guide to investing in the market, but I really don’t think it should be your guiding light. Again, this is ‘the market’ we’re talking about and not specific companies or industries. A company based on news or an industry based on its own seasonality might buck these historical snapshots. Above all else, macro economic news will drive the market up or down, if the news is significant.