Monday, January 31, 2005
Stockcoach the bagholder
Would you like paper or plastic Mr. Stockcoach?
Neither thanks. Within minutes, my limit order was filled at $5.75. Needless to say, the stock got hammered. It finished the day at $4.85 (and down more in after-hours). And now I’m looking at a $2000 paper loss. Who do I blame? Well, I suppose I was partly at fault for having the limit order just sitting there in the first place. And it was certainly my fault for placing such a large order (last time I do that, lesson learned!). But realistically, trying to buy small cap stocks without a limit order is even more stupid. Anyway, what the heck was the company doing announcing this at 2:00 in the afternoon??? Stuff like that should be announced when the market is closed. I blame myself to some extent, but I blame the company even more.
What to do now? Not sure. The news actually wasn’t that bad. Yeah, I know restatements can be ugly. But I have seen my fair share of restatements, and I suspect this one won’t be that bad (if it happens at all). Under $5, this company is a good hold for the long term. And I suspect I may end up holding it for sometime cause I’m not prepared to realize my loss just yet. Heck, if it goes to $4 I may buy some more (though probably not considering how peeved I am at the company right now).
Anyhow, I’m glad January is over. I ended the month down 0.2 percent, compared to the S&P and Nasdaq, which dropped 2.5 percent and 5.2 percent, respectively. Though I still outperformed the major indices, the margin of outperformance slipped considerably over the past 5 trading days. I’ve updated the charts on the right, and included a little table in the first chart showing the percentage gain in my portfolio in each year starting from 2001.
Let’s hope February is a more profitable month than January!
Friday, January 28, 2005
Even more about Cramer’s investment performance!
What’s at issue is the interpretation of this result. Let me explain. Cramer invests in relatively large stocks that comprise the S&P 500. Thus, it seems reasonable that one should compare his results to the S&P 500. Yes, but not quite. You see, when investors pick stocks from the S&P 500, they don’t typically weight their portfolios by the capitalization of each stock. So if I wanted to buy Intel and Tupperware because I thought they were both great companies, there’s no reason why I would buy 100 times more TUP than INTC simply because INTC has a market capitalization 100 times that of TUP.
Thus, when benchmarking performance, one should use an index that gives equal weight to the stocks in the S&P 500 (the equal weight index), as opposed to the standard S&P 500 index that one always sees that weights the stocks based on their market capitalization. Now, as it turns out, over long periods of time, the market capitalization S&P 500 index tends to yield about the same return as the equal weighted S&P 500 (well, almost as large since midcaps have historically outperformed large caps by a small margin). However, as this chart shows (after opening, click the 'compare to' button), the past 5 years have been exceptional, with the equal weight index outpacing the market cap index by an incredible 55 percent on a cumulative basis. Since the beginning of 2002 (when Cramer's portfolio was formed), the equal weighted S&P 500 index has outperformed the market cap weighted S&P 500 index cumulatively by about 22 percent. Moreover, the equal weighted S&P 500 index has even outperformed the Russell 2000 over that time.
And by how much has Cramer outperformed the market cap weighted S&P 500 in that time? Oh, by about 22 percent. In other words, Cramer’s portfolio has done no better than the equal weight S&P 500 index. Now, I am not going to disparage the Street.com for advertising the fact that Cramer has beaten the market cap weighted S&P 500. That’s the benchmark that everyone uses, including myself. Furthermore, no matter whether one likes or dislikes him, it's hard to deny that he is a smart guy with lots of brilliant insight into how the stock market works. However, the fact remains that Cramer’s portfolio has done about as well over the past 3 years as the average return on 1 million portfolios constructed by taking the stock picks of 1 million monkeys throwing darts at a list of stocks in the S&P 500. Come to think of it, there is a certain simian quality about the guy...
Thursday, January 27, 2005
James Cramer's Investment Porfolio -- Follow up
Lost another one to Nasdaq!
Wednesday, January 26, 2005
Jim Cramer's investment portfolio
How come I wasn't invited to the party?
Tuesday, January 25, 2005
I hate Travelzoo
Travelzoo is the stock market's equivalent of William Hung: anyone with any sense knows he can't sing, yet there he is, absorbing the limelight, well past his 15 minutes of fame. Ahh... perhaps I'm being too harsh. I did, after all, present a theoretical example in an earlier post of why it may be profitable for investors to buy a stock even when everyone agrees that the stock is overvalued. Still, I hardly suspect that too many people are buying TZOO because of some sophisticated trading argument. These sad folk are bagholders plain and simple, and sooner or later they will pay the price for their ignorance. As far as I'm concerned, hopefully sooner rather than later.
Anway, due to TZOO and dips in GTSI and MRM (two of my largest holdings), my portfolio was down $460 today.
Monday, January 24, 2005
Stick a banana in it. Travelzoo is dead!
Anyway, despite a nice gain on TZOO, my portfolio was down $1,200 today, representing a drop of about one third of one percent, about in line with the decline in the S&P 500 (though still much better than the hapless Ponizdaq).
Friday, January 21, 2005
All in all a good week. As of the close of trading today, my portfolio was worth $376,850, up $6,218 from last Friday. Today turned out to be a busy trading day, a rarity for me because I try to avoid excessive trading to the extent possible. Four trades in total:
- Sold my shares of EDAP. I had purchased them more than 2 years ago at $1.50 when they were trading below cash value. The company has executed reasonably well since then, but I think the stock has gotten ahead of itself. I bailed today and sold out $4.75.
- Bought back my shares (and then some) in BOSC. As faithful readers may recall, I sold them only a few weeks ago. However, that was in the midst of a major surge in the stock price as daytraders piled in with the hope of making a quick buck . Since then, the shares have fallen by 50 percent. At $2.40, the stock is now trading not far above cash value, and with growing revenues and its position in the hot VOIP sector, I think there is plenty of upside here, and relatively little downside.
- Bought shares in AVGN. This biotech is losing money but is trading well below cash value, which I think will give me lots of downside protection. The company is working on a cure for Parkinson’s disease. I don’t know whether they will succeed, but I’m willing to roll the dice on this one.
- Bought shares in GIGM. This is my third time in this stock, although this is first time that I’ve bought above $1. However, the company’s fundamentals and prospects have improved a lot over the past 6 months. Yet, it’s trading at close to cash value. At the very least, I think it should be a $2 stock.
Thursday, January 20, 2005
Are dividends a good thing?
On the other hand, dividends can be a form of signaling by which honest firms can signal to the market that they care about shareholders by returning money to them today instead of taking the money and using it to purchase $6000 shower curtains (i.e. a bit like going to university to prove that you are bright, not because university makes you more productive). I think this helps explain the current fad for dividend paying stocks (especially in light of Enron and WorldCom).
The Ponzidaq keeps crumbling
Wednesday, January 19, 2005
Back on top
Tuesday, January 18, 2005
In other news, I sold my shares in ZCOM at the open (at $2.30 per share) after the company announced quarterly numbers that were worse than I expected. I don't typically dump a stock just because of one bad quarter, but the problems here seem more entrenched and I suspect it will be some time before they regain profitability. For the time being, I'd rather be on the sidelines.
I also added a new stock to my team: Goldfield. Don't let the name fool you: They are not engaged in gold production. It's a nice value stock with a market cap of $15 million and $30 million in annual sales, trading at 75 percent of book value, and generated cash from operations of $4 million last year. Good enough for me; I picked up 15,000 shares this morning at 57 cents per share.
Friday, January 14, 2005
Thursday, January 13, 2005
Another bad day
Wednesday, January 12, 2005
NASDAQ up, Stockcoach down
Tuesday, January 11, 2005
Momentum stocks hit a brick wall
I also added a new member to my portfolio: AVCS. It's another interesting smallcap stock; trading below book value; lots of terrific assets on the balance sheet; and lots of insider buying at prices much higher than what I paid. I suspect the only reason it went down is because a major holder of the stock was forced into liquidation, and was forced to dump nearly a million shares on the open market. Much of the selling appears to be over as volume has dried up, so I'm hoping we go higher from here. Still, the stock is not without risk, so please read the disclosure before you even consider following my lead.
Monday, January 10, 2005
Couldn't resist ... loaded up on ASIA
TZOO, why won't you die?
Sunday, January 09, 2005
I ran my stock screener this weekend
Stockmarket returns over the next 10 years
1. A stock's total return is the sum of its dividend yield and its capital gain. If the market's P/E ratio is assumed to stay constant, then the capital gain (the growth in P) is equivlant to the growth in E (earnings per share).
2. The dividend yield is a function of the payout ratio (the fraction of a firm's earnings that is paid out in dividends). Historically, this has averaged about 50 percent, although this number has declined somewhat over the past 2 decades. A reasonable estimate for the dividend yield on stocks for the next 10 years is 2 percent, which is slightly more than the current dividend yield on the S&P.
3. What about capital gains? As mentioned, capital gains are a function of growth in earnings per share (EPS). Corporate profits have tended to average about 10 percent of GDP over the past century. There have been troughs (such as the Great Depression) and peaks. When was the last peak? Well, we're living in it now. Corporate earnings as a percentage of GDP are close to their historic highs. One of the reasons that corporate profits have accelerated is that productivity growth has picked up significantly since the mid-1990's. This has allowed firms to shed excess labor, which has kept wages fairly stagnant. The result: profits have jumped. In the best case scenario, real GDP growth wil contine to be strong, perhaps even rising to 4 percent over the next decade.
5. What does this imply for growth in earnings per share? Well, clearly EPS will not grow as quickly as GDP since new firms will enter the market and hence, aggregate U.S. earnings will end up being split among more firms. Also, existing firms will continue to issue new shares, thereby partly diluting existing shareholders. Historically, these two factors have implied that EPS growth has been about 2 percent lower than GDP growth. However, if corporate profits as a percent of GDP decline over the next 10 years towards their historic averge, EPS growth will lag GDP growth by more than 2 percent.
6. The market P/E is about 20 right now. The historic average is 16. Thus, if valuations decline to their historic average, the P in the P/E will grow less quickly than the E.
7. Now let's put it all together: If profits as a share of GDP stay the same and valuations do not fall, this implies that real EPS growth will be 2 percent (4 percent real GDP growth minus the 2 percent wedge between EPS and aggregate profit growth). This yields a total real return of 4 percent (2 percent dividend yield plus 2 percent capital gains). So in the case scenario, stock prices will grow by 4 percent in real terms over the next 10 years. Assuming inflation stays at around 2 percent, that's 6 percent nominal growth in stock prices. Again, this is the best case scenario. What's a "realistic scenario"? Well, a realistic scenario is one in which the market's P/E ratio declines to its historic average of 16 and corporate profits as a percent of GDP decline by about 2 percent. Taken together, this lowers expected stock returns by 4 percent per year to about 2 percent per year. And that, of course, still implies that the economy will growth at an above average pace, which is far from certain.
The bottom line is that Wall Street's "conservative" estimate of 7 to 8 percent growth in stock prices is not nearly conservative enough. In the current market environment, 2 percent is about the best bet that one can make. As Warren Buffet once said, if stock returns came from history books, librarians would all be millionaires. The fact of the matter is that historic returns have been colored by the fact that analysts have confused apples with oranges. In the late nineteenth centruy, the market's P/E was less about 5 because stocks were perceived then to be very risky, reflecting much worse corporate governance, high transaction costs, and fewer ways to diversify one's portfolio. Furthermore, the 1970's and early 80's witnessed very high inflation, which artificially boosted nominal equity returns (but not real equtiy returns). This accounts for why historically, stock market returns have averaged about 8 percent. However, future returns are likely to be a lot lower.
Friday, January 07, 2005
Thursday, January 06, 2005
AEHR's mysterious ways
Wednesday, January 05, 2005
Investor's Buiness Daily: the tabloid of financial journalism
The system is headed for a collision with the hard wall of reality in just 14 years. That's when Social Security's revenues will no longer cover its costs. The many who insist there is no crisis ignore reality. By every realistic actuarial estimate, Social Security is headed for a bust.
So let me see if I got this right? The general budget of the U.S. federal government is running $400 billion plus cash deficits, but Dick Cheney isn't concerned because "As Reagan proved, deficits don't matter". The reason they don't matter is because the U.S. government can just keep issuing treasury securities to finance budget deficits. Now it is true that according to the latest estimates, by 2018 cash payments to Social Security recipients will exceed receipts from payroll taxes and the fund will have to draw on a huge stash of treasury securities that it has accumulated over the preceding years. But you see: all those IOU's in the form of treasury securities that the social security trust fund has built up aren't really worth anything. Huh? Well, let's tell that to the Chinese and Japanese central banks that have been buying them. I wonder what would happen to interest rates if they believe the editors of Investor's Business Daily? But I guess I shouldn't complain too much. Without their stupid stock recommendations, I would never have been able to short Travelzoo at $101.