Friday, August 3, 2012

"Face" value

What price would you buy Facebook at? I would buy it at 12$.

Now before you start screaming and shouting at my rather reckless prediction, I would ask you to give me a few minutes to explain this craziness. For that I refer you back to my earlier explanation of simplified DCF calculation where I had postulated that we should give about 1 point of P/E for every 5% growth.

If I look at the most optimistic estimates on Facebook, there is a projected growth of 50% in the near future. If I apply the simplified DCF calculation that gives me 10 points of PE and starting with a base line of 8.5 PE that would give me a acceptable PE of 18.5 from the current levels.

With the current year estimate of 55 cents at the high end that would make the share price about 10+$. If I were to give Facebook the benefit of the 900 million users and a successful mobile strategy in the near future and add an additional 30% to its growth rate, that would make it approx 25 PE and a share price target of 13.75$.

So there you go, I will buy it at its midpoint of 12$. Now the question is if I would actually have the nerve to buy it based on my instincts after an additional 40% drop from its current depressed levels.

That, only time will tell.

Wednesday, July 4, 2012

At the RIMM

So its not a secret that Research in Motion is at the verge of imploding and that almost everyone is betting against it. So I had to be the guy who took the wrong side of the bet and here I am writing about my strategy to wriggle out of a losing bet.

RIMM trades at approximately 7$. Given that it has about 4$ in cash, 3$ is patent assets and another 2-3$ in network asset, the overall intrinsic value of the hard assets should be around 10$ is you factor in 2$ in layoff charges and an additional 1$ of losses to be incurred in the next 2 quarters we are truly looking at RIMM at around 7$ as of Jan 1 2013.

Now about that bet. The bet goes, RIMM will not exist as a company by January of 2013. Its a 100$ bet and I have bet that RIMM will be around.

Given that they will not run out of cash by then and they will hold off liquidating assets until BB10 releases, we can safely assume that the only way RIMM will not exist in its current form is if they get bought out. Assuming buyout talk happen around September time frame to be able to close anywhere near Jan 1 2013, we can safely assume that RIMM will not be selling at the bare bones value of 7$.

So the question is how much will it go for? At the current book value of 19$ that is fast eroding, if we take away another 5$ and say the company sells for 14$ a share, I would have lost my bet of a 100$.

So here goes the gamble. Call options for Jan 1 2013 striking at 12$. I wish I had waited for the quarter report and bought the 10$ options but this is my hedge against losing the bet for now.

Friday, May 18, 2012

Facebook & VXX

It was a nice sporting event to watch this morning as the the worlds most popular social media company went public. I must admit there were moments of weakness when I thought I should simply put in an order for 100 shares and claim my stake in history.

Turns out I didn't and much to my pleasure I might add. I suspect I will look back at this day and kick myself for not buying into it just like I look at Google today but I think my investment interests have moved beyond that thinking.

The rationale behind my not buying it today is the following. A 100 share lot would cost be 4000$ and 100% upside would give me another 4000$. But do I have conviction to hold on when the stock is falling; probably not. These days I hate holding stocks for which I do not have conviction to hold on atleast for a 30-40% drop. Its way to costly an experiment to run with my hard earned money.

Now if there were options being traded today I might have bought into it, but I couldn't find any. I guess regulators are clamping down on that. So I think I will stick with my current strategy of accumulating the stocks that I conviction in, though the weak market is making it hard.

On a side note, my VXX play is finally in +ve territory today. Looks like the market had some serious downward bias and VXX is spiking. I hope to hold on to it through May and see what June brings. Hopefully it will make holding my longs that less painful.

Friday, April 13, 2012

The VXX play

I am so tired of taking a beating on my portfolio each time the market decides to swoon for whatever reason. I have way too much money and energy invested in the market to be going through this over and over again.

Last year around July when the market had rallied for three good years following the "Great Recession" I was sitting in the cafeteria wondering what to do next in the market. Though the rally in the market had hurt me in 2008 it was not too shabby in 2011. But it took three long years and a really good rally to bring me back from the brink. It was that day that the market fell 400 points with high volume and a lot of conviction.

I sighed in dismay as I watched the stocks fall. First instinct was to sell the damn portfolio. But then what about all the buying I had done when the market was down. Wouldn't I lose my enty point. And what if the market was just doing a head fake. So for once I decided I will buy into the volatility rather than selling into it. Historically, I have always got shorting a stock wrong. I think the main reason for that is the decay time and the cost of the "put" that is hard to predict. So I went ahead and bought calls on VXX.

I did get it right for the next six months and I think the strategy is working to protect my portfolio to some extent. The good thing about playing options on the VXX is that you only really need to get the general direction of the market right and as long as it is not going straight up VX is probably not staying down either.

This is not a get rich quick scheme but my desperate attempt to protect what I have in the market from taking a knock each time I leave in in there without paying me back at least some of my losses. I may not get it right always but 200-300$ every 6-12 months to protect at least part of a larger portfolio seems to be a fair price to pay even if I get it wrong.

Now VXX is at 19 and the market is showing some conviction to the down side. I am on the VXX play again. Lets see if second time is also a charm.