Friday, February 10, 2012

2011 in Review

The year 2011 was quite eventful and it deserves a brief review.  (And that's not including my personal life events!)  I will focus mainly on the sectors relevant to my portfolio, but I'll also try to address some macro issues as well.

First Solar
Let's get the most difficult one out of the way: First Solar (ticker: FSLR).  This was one of my favorite stocks,  but sadly, it wiped out all of my gains for 2011 and then some.  Let's not mince words here... I was dead wrong!  It was not so much wrong judgment of the company's relative performance to its peers as the wrong judgment on the company's ability to avert catastrophe under unfavorable macro conditions.  My overall assessment of the company still stands; it will weather the consolidation of the solar sector and then go on to become a great company again.  However, I was terribly off in my valuation of the company.

Let's look at the lessons learned here.   First, I ignored the many warnings of a supply glut of solar panels.  I believed that because First Solar led the cost per watt metric by miles, that it would be able to maintain high revenue growth along with high margins.  I was proven wrong here.  The Chinese manufacturers were able to dump panels at very, very low prices, causing the sector to essentially implode.  Although First Solar was able to achieve gross margins in the high 30s, its revenue decreased. Earnings significantly missed the mark.

This leads to the second mistake: I trusted management too much.  It had maintained that earnings for 2011 would be around $9 all the way up until October. Then the board kicked the CEO out and revised earnings to around $6.  And this was two quarters gone already.  How do you miss by 33% and not let shareholders know until it was too late?  The CEO had too little skin in the game (i.e. did not own enough shares), and I ignored that too.

Third, I doubled down without double checking.  Phil Town advises us to stockpile a stock if its share price drops significantly, but we would need to know the business is still intact.  I missed the second part.  Again, circle back to mistake 1. I didn't do enough homework.   I should have proven to myself that First Solar could survive a major sector consolidation unscathed.  By stockpiling, I amplified my losses.  The stock saw an impressive 70% drop off its peak!  Luckily, my other stocks performed well and offset some of it.  Perhaps I need to look at limiting any one stock to a certain proportion of my portfolio to prevent such losses from occurring again.

Will I invest in First Solar again?  That is a definite possibility.  I sold all of my position at $37 when they announced the big restructuring.  The stock dipped to near $30 and has rebounded very nicely to $49.  I guess I should have held on a little longer.  But who knew where the stock would have ended up!  The founder is now back at the company's helm and has a viable business plan.  He knows that solar panels are commodity items and is steering the company into value-added services which allows it to charge a premium for its services and panels.  Its focus on large scale projects in emerging markets is also encouraging.  The company, however, will be going through some tough times as it's 2012 forecast numbers aren't great.  I'm staying clear until there is a compelling case for a rebound in revenue and earnings growth.

The stock (ticker: GOOG) in 2011 went for a rollercoaster ride and basically ended up the same place as it had started.  That's not to say the company and its business has done the same.

First, Larry Page, the co-founder is now CEO of the company.  Android is now the most popular smartphone platform on the planet. Google is in the process of buying out Motorola.  Google+ was released and is slowly building steam.  Chrome is now the second most popular browser after Internet Explorer, surpassing Firefox.  Its bread and butter, search, is still gaining market share.  Most importantly, its revenues and earnings continue to grow steadily.

Q4 was a little bit of a hiccup.  Revenue growth was really good, but their cost of revenues and operating expenses grew a little more quickly.  Thus, their earnings were impacted and grew "only" 10% YOY.  Given the number of new initiatives Google has on its plate, I think this is acceptable.  We'll need to keep a close eye on this.

I still like Google's's not going anywhere any time soon!

True Religion 
True Religion (ticker: TRLG) is another of my darling stocks.  It just released its Q4 numbers and the street was not impressed with afterhours trading.  It was down as much as 25% afterhours.  Do note that the stock has appreciated from low 30s to mid to high 30s as it came closer to earnings.

The story remains the same for the company.  Consumer direct segment (i.e. their own stores + online sales) grew significantly, while the US Wholesale segment continued to shrink.  As a result, gross margins continued to rise to 64.1%.  However, the operating margin decreased from 23.6% last year to 20.7% this quarter.  The increase in SG&A costs in domestic and international expansion.  Same store sales were up 11%.

I'm going to take this as a buying opportunity.  My rationale is this: 1) Consumer Direct is killing it and the North American market is far from being saturated, 2) gross margins are super high and rising - this indicates consumers wants their products and are willing to pay the price, and 3) same store sales are increasing - translating into better brand recognition (e.g. they are not just increasing revenues by opening more stores).  We went through a little of this in mid 2011.  The business is intact and I'm going to put my money where my mouth is.  Tomorrow, I'm going to stockpile some more of this baby!

Synaptics (ticker: SYNA) makes touchscreens for phones/tablets and touchpads for laptops.  The stock has been on fire recently.  I got in in the mid $20s and now it's ~$38!  They have shifted their product mix for touchscreens and that has increased margins and profitability.  With the secular growth in the mobile space, I believe Synaptics will continue to do well.  With P/E ratio of 23 right now, I may just take some money off the table and wait for a dip before getting in again.

US Economy
I believe the US economy is in for a great year.  2011 was a little bit of a drag, but I think that was largely due to the Japanese Tsunami.  It disrupted global economic activity and we saw the US jobs market take a little bit of a breather from its growth in mid 2011.  Below is a graph of the US unemployment rate of the last 60 years (courtesy of Google Public Data).  See how every peak of unemployment is followed by a sharp drop back to more reasonable values?  I believe we will see the same sharp drop starting this year.  Already, we're down to 8.3% unemployment (and don't believe the pundits when they say the unemployment is down all because people are no longer looking for work...look at the stats yourself...I have).

Europe will continue to struggle with its debt crisis.  I don't know what's going to happen in Asia, but I think the US will be the shining star in 2012.  Hey, I'm no economist, but there are certainly good things happening in the States.

While I did quite horribly in 2011, I'm hopeful for a better 2012.  How did you do in 2011?  Leave me a comment!