Sunday, September 5, 2010

A case for Pfizer

With the recession dragging along what looks interesting? Apart from the obvious Phillip Morris international that is firing on all cylinders, Pfizer, to me is another interesting play. Given that today's interest rates are at less than 1% on savings account, anything giving you 4.5% dividend needs to be carefully examined.

The case against Pfizer has been, what is interesting about it? At 7.5 times forward earnings, Pfizer has been discounted for its Lipitor expiry and the fact that Mr.Obama is going after the health industry with all he has got. But what Pfizer has going for it is the 4.5% dividend and the fact that it is progressively integrating Wyeth into its business, cutting research cost and streamlining its business. Though selling its consumer business to JNJ looked stupid at that time, now it makes sense given that it absorbed Wyeth's consumer business instead. With the strain of the 60 billion dollar acquisition easing and the dividend slowing growing in the next few years, it might make more sense to pile into Pfizer right now rather than later.

I was a buyer of Pfizer at 14$ when the yield was 5%. At this point I am not so sure. It is still pretty cheap, but given the markets schizophrenia, there might be opportunities to buy it below 15$ again this fall.

Either way, buying into these big dividend stocks in this low interest season might be a way to play the bond market without locking yourself into bonds that already seem pretty pricey.

Saturday, August 14, 2010

The double dip

The euphoria has ended and there is now a convincing talk about the double dip. The question is, do you buy into the hype or do you hold on?

Most times I have observed that one is willing to hold on early in downturn. The confidence from the previous uptick generally gives the investor a false sense of confidence and he or she rationalizes the portfolio and its holdings. But as in a bear market, once the downturn becomes sustained and the pain becomes unbearable, the confidence erodes and everyone starts bailing out.

We are at the cusp of something similar here. The road ahead is dark and there is little clarity on what is going to happen next. There is a lot of merit in not riding the market all the way down and bailing out now if you are convinced that the market is going down. But what if it doesn't and what this is a head fake. If you get out of your positions and the market turns after that, you would be left looking like a fool.

As in every downturn, if you ride the market all the way down, even if the market recovers, there is a lost opportunity cost of the money that is already in the portfolio that has lost value and is simply recovering losses in the uptick. What we need is a way to make money on the downturn to compensate for that opportunity cost. Since I do not want to give up my holdings yet, enter options trading.

Though this might be a little late given the sentiment in the market has already turned, PUTs on S&P might be the thing to invest in for the next 3-6 months. The question is the strike price and the time frame.

Depending on your threshold for pain, October puts 100$ puts is currently trading at over 2$. If you are convinced that the market is trending down for a double dip, 2.23$ might not be a bad insurance premium to pay.

For a 10,000$ portfolio, if you were to buy 1 SPY PUT option you are covered for a value of 10,000$ at 100$ strike for a cost of 200$. Assuming the market doesn't tank, you lose 200$ but if it tanks like it did for a recession, it would happen in the next 3 months, and we will look at a 20% correction taking SPY to 90$. That is loss of 2000$ in the portfolio that you are holding but a recovery of 1000$ through your options for a cost of 200$ for a net recovery of 800$. So your percentage loss on the portfolio is 10%

That was best case scenario for this investment idea, all the normal disclaimers for the worst case still apply :-)

Saturday, August 7, 2010

Mark Mark Mark

Today Mark Hurd decided to step down as HP's CEO accepting the fact that he had acted against the principles of company. The stock tanked 10% and he is planning to walk away with 28 million.

As an investor in HP I am a stunned by this event. Now while most people would think that I am holding Mark to higher standards based on nothing but his performance as a successful CEO, really the shock comes from the poor judgment he showed in getting involved in such a worthless incident. He was in a place where most CEOs only aspire to be, and he threw it all away on a silly fling. The point of contention - he charged his little fling to the company account. Putting aside the moral aspect to this entire incident, for a man making millions a year and with a reputation few could only dream off, what an unfortunate choice he made.

Now that it has happened the question is what next. HP is firing on all cylinders as a company executing on all fronts. The stock, until yesterday was only looking for a clear signal from the economy to get off to the races. But now the question is, do you buy this dip and assume that one man doesn't make a company such as HP or sell before the house of cards come tumbling down.

The problem here is that one man may not make the company but he might be the one holding it all together. Leadership is always key when it comes to steering a ship as big as HP. It is unclear if HP will find another leader such as Mark Hurd to captain this ship. If they don't it may not be long before the company starts looking like the old fragmented HP.

Having said all this I am going to buy on the dip. Assuming that 99.9% of the management is still in place and the acquisitions that have been done in the past few years is beginning to bear fruit, HP still might be able to keep going. With consolidation in the technology industry the path of the future, HP has become a truly integrated technology company. With a stronger networking equipment portfolio (the 3COM acquisition did not do it in my opinion) acquisition I think HP might be one of the most diverse and well integrated organization out there.

At 40 and below HP will be a buy in my books.

Saturday, July 31, 2010

The selling itch

It looks like the market is in a shaky place again. From here on it could be headed in either direction and the people who call it right will surely feel smarter than the others. But it is in moments like this that you begin to get that itch to take all your profits and run from the market least it becomes schizo again and take you down with it.

But here is a thought. The market has moved from 6000+ to 11,000 and no one believes this is sustainable. There are some who believe the market may go higher, but those people are far and few. The real money will be made when the market moves further up from here because that is when the skeptics will feel like they have missed the boat and start coming in in droves. This is really the point to which you need to stick with the market.

As an example, 2002-2005 was a period of great uncertainty in terms of market volatility. People who stuck it through those times had a nice upside waiting for them on the other side of 2005. I

The caveat here is that it all came down in 2008 but people who traded between 2005 and 2007 with holdings that were built between 2002 and 2005 made hay. when the market gets to this point, it is time to look for an exit. The hard part is telling when would be a good time to call it quits. I would say a 20% upside from here and we will make believers of the market watchers and from this point on the market will start building froth.

So here is the call, hold on till Dow 13500, Nasdaq 2700 and S&P 1300. Build on top of your core holdings every time the market slips before that. Once at that point start looking for the exits. When you see a 10-15% upside from that point is the time to start selling excess holdings and trimming back to core holdings.

Until then just put some ice on that itch and ignore it, cause it will cost you dearly to get out at this point.

Monday, May 24, 2010

Momentum trading

Sprint caught a couple of upgrades today and the market took the stock up pretty quickly. The last couple of weeks when the market was getting beaten down by the bears, Sprint refused to go down. These are very positive sign in terms of trading on momentum.

As noted earlier Sprint seems to be everywhere these days with advertising. They seem to have got all the products they needed to get out there with a comprehensive story and they have been blanketing the media with ads touting those products. This helps analysts and pundits build a bull case for a stock.

None of these are fundamental reasons for buying Sprint. But such market trends, where a certain stock resists being beaten down my the general market followed by some upgrades generally is an ominous sign of a break out. It generally means that somebody big believes the story. So if you are looking for speculation you might have just found it.

Friday, May 21, 2010

PM approaching "deep value"

This market down turn has brought opportunity back on the table. Granted that the market is still sliding and today's action may not be any signal that we are going to start going up again, but nonetheless it is time to see if we are approaching value in any corner of the market.

Phillip Morris International might be one such stock. Currently trading at 44.26$ this stock might be a good case study for this down turn and an experiment on the "Simplified DCF" that I had mentioned earlier. This is ofcourse looking beyond the morality of investing in a organization that sells cigarettes.

PM has a trailing EPS of 3.41$ and a forward EPS of 3.82$. The projected growth rate of the company is about 10% for the next five years and it yields a dividend of just above 5%.

If we use trailing EPS as our reference then 3.41 * 10.5 = 35.80. Plus an additional 2.32$ of dividend and that makes it 37.80$. The company is purchasing stock back at a rate of reducing the float by 12%, so if we factor a 12% increase in value that is an additional 4.53$ which brings us up to 42.336$.

If we take the forward EPS as our reference then, we first discount the projection by 10% which is 3.45$. So 3.45 * 10.5 = 36.225. Plus the dividend and the buyback adjustment and we have 43$. Now if we consider the Euro crisis as a hit of 5% to future earnings if the Euro continues to slide, then we have 40.85$.

So in summary the deep value for PM appears to be around 41-42$ and at 44.26 I am close to calling it fair and jumping in. Given the market negativity and assuming that the slide continues for some time I don't think it will be hard to pick up PM at 41$.

Friday, May 14, 2010

Buying low

This is the time when it seems like the carpet is being pulled from under you. The market seems to have taken the whole Euro bail out like a big lump that just wont go down. Tough every one out there is calming everyone else things seem to be on a slide. The market is now off more than 10% and though I have added to some position this week, I haven't really been on a buying frenzy yet.

Last time the market crashed in 2008/2009 I was reluctant to add to my positions. I was not sure where the market was going to end up. But I did buy pretty aggressively in late 2007 when the markets had started falling, resulting in added pain as the market continued to go down. So this time I am going to sit out the slide. Either the market hits doldrums before I start getting in again or I sit this one out and enjoy the upside that will follow with whatever I am already holding

The key to buying low is to actually by low and not buy on the way down - when you "think" it is low. From my experience you are better off buying 5-10% above the bottom than buying 5-10% on the way down to the bottom. Psychologically it is much better for an investor. If you end up buying a lot of stuff on the way down then you are cash strapped all the way to the bottom and are unable to participate on the way up. This does a lot of damage to the investors confidence as he nervously waits and hopes to regain lost ground.

The key is not to get a twitchy finger and pull the trigger just because you are nervous about the falling market. Find a price point you will add to the holding no matter what and wait for the slide to do the rest. If it doesn't come to it, well then you can enjoy the upside of whatever you are already holding.

Wednesday, May 12, 2010

Simplified DCF

The concept of discounted cash flow brings a certain appearance of sanity to the process of asset valuation. Every person/site that explains this concept always gives a caveat about the fact that DCF cannot be used in isolation and needs to be used in conjunction with other factors such as book value, growth rate (though this could be factored into DCF calculation), market penetration, market size and even more intangible factors such as market mood, management strength and else.

I once read that Warren Buffet could tell you in a few minutes of hearing about a company if it is deeply undervalued/discounted at current market price. This is a price at which you would be a moron to not buy it. After reading about this (and I was investigating DCF at that time) I have come up with a model of my own. Though you will find that this calculation is rather aggressive I think there is something to it if you are looking for deep value. How do I know you ask? Well I had done this calculation for a number of companies sometime in 2007 and at that time the numbers that I came up with were almost half of the current value. But following the crash of 2008 most of the companies bottomed out in and around the numbers that I had computed. So I have some renewed confidence in this calculation. Unfortunately these will be numbers that you will not see in today's market but you can always recognize value when you see it.

So in this simplified calculation, for every 5% growth rate over a period of 5 years I add 1 to 8.5 (which is the base multiple) and the resultant value is the multiple of annual EPS that should determine the current market price. These numbers come from doing multiple DCF calculations for multiple companies and observing a pattern.

So if you have a company with an annual EPS of 2$ and a 5 year growth rate of 10% then the "deep value" price is 10.5*2 = 21$. Having said this I always discount the growth rate a few point from the projections especially for high growth companies.

In 2007 this calculation yielded a 250$ value for GOOG. I believe GOOG bottomed out in the low 220s. This was the case for a few other companies that I was following.

Now I too have a way of telling if a company is deeply undervalued and if there is a buffer in the price I am paying for a stock.

Tuesday, May 11, 2010

Sprinting to success

I have been noticing that in the last few months the Sprint brand name has been popping up in several places. Wall Street Journal is one of the most obvious ones I have seen thus far. Now as most of you know, Sprint has been relegated to a very distant third in the world of mobile service providers, but there are some exciting things happening at Sprint which is worth taking notice.

Seeing the Sprint add I visited their website. I was particularly stuck by a service they offer that delivers broadband connection via a 4G network which can then translate into a hot spot in your home. I for one am sick and tired of finding bargains from Comcast and am really tired of this one provider model available to most people living in apartments. Sprint provides me an alternative to such a model. (Well, at least worth a look). They also seem to be expanding into corporate networks, providing mobile 4G service to executives on then move. All this without considering that they would be the first 4G network in the consumer space as well.

Sprint has its own problems, but at the current valuation and considering they have probably hit rock bottom in terms of subscriber loss, this might be a speculative play worth noting.

Opening shop!

This blog is an effort to log my investment thoughts as and when it hits me. I make no claim to be unbiased in my investment thoughts and they are indeed heavily influenced by my investment strategies and ideas. So please read anything on this blog with that in mind.

Many a times I have seen the market behave in a certain way and thought to myself that I had predicted that. But over the years I have been more wrong than right in my investment choices and decisions. So this blog is more to chronicle my thoughts and use it as a reference for the future to see how many time I was actually right in my predictions and thoughts in comparison to my actual investment decisions.