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.

Google
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 story...it'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
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.

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

I Bought Some First Solar (FSLR) Today! Part 2

This is going to be a reoccurring theme...buying First Solar on the cheap.  As I try to stick to my stock allocation strategy, I can't help but keep wanting to buy more of First Solar.  This stock is now 33% off from its 52-week high of $175.  If you buy now and it rises back up to that point, you get a nice 48% gain.  So, I decided to buy more today.

Why am I so confident in the stock?  Here's why.  First Solar reported its Q1 earnings on May 3, 2011.  That is more than 4 months into the FY11.  It reiterated its earnings per share guidance for the year of $9.25 to $9.75.  First Solar has a pretty good record for beating analyst estimates, which don't deviate too much from the issued guidance.  So, chances are First Solar will earn at least $9.25/share.  At $118, this works out to be a forward P/E of 12.8, which is a very, very modest P/E ratio, considering it has been sitting near 20 for the past couple of years.

What if they miss estimates?  How bad could they be?  Let's say they miss by a full $1.25.  That gives $8.00/share, which results in a P/E of 14.75, still below the current P/E of 17.  I would say there's quite a bit of margin of safety here.  Since the year is back-end loaded, I can somewhat foresee that the stock price will rise in the second half as Q2 and Q3 results are announced.

Moreover, I believe First Solar may actually beat the estimates.  It earned $1.33/share in Q1, which beat estimates by $0.17/share.  That is not really the important part.  The important part is that they achieved this despite some difficulty.  Their CFO, Mark Widmar, explained in the Q1 earnings call that "net sales for the first quarter were $567.3 million, down $42.5 million or 7% compared to the fourth quarter of 2010. The decrease was primarily driven by lower volumes as we allocated modules to system builds to meet contracted delivery schedules. Revenue recognition is expected for those volumes later in the year."  What this means is that they had produced a number of panels, but they went to the system builds (large scale projects), where the customer doesn't pay until a certain milestone is achieved in the project.  The product is out the door; they're simply waiting for the money to come rolling in.

First Solar also benefits from the fact that they are a systems builder.  So, instead of just selling panels, they actually build solar farms using their own panels and sell the farms to operators.  An analogy that can be used is this.  There are 2 miners who operate gold mines.  Miner A mines the gold and simply sell the gold bars at whatever price gold happens to be.  He makes money, but margins are low.  Miner B also mines gold, but he also has a jewellery wholesale operation.  He signs contracts with Tiffany and the like at the beginning of the year and produces fine gold jewellery for them using the gold they have mined.  Miner B is at an advantage because he is no longer selling a commodity.  You can't go on the open market and buy a designer necklace at the current necklace price.  There is no current necklace price for a designer necklace.  Miner B is able to differentiate itself from competitors.  He also has good visibility of what's coming down the pipeline.  He already knows what the contracts call for and the prices at which the goods are sold.  Therefore, First Solar's forecast carries more weight than pure panel makers.  Pure panel makers make forecasts based on how many panels they can produce and a guess of what the average selling price (ASP) would be.  If the ASP falls dramatically over the course of the year, the forecast would no longer be correct.

That said, First Solar is likely not immune to falling ASPs.  If customers see a dramatic drop in ASPs, they may want to re-negotiate the price of the system.  Customers typically aren't stupid either.  This risk, however, is smaller than the risks that pure panel makers face.

Am I nervous about the dramatic decline in stock value of First Solar?  Sure!  Am I hopeful that it'll bounce back?  Absolutely!  In the game of stocks, we need to take out emotions, which often drive us to do irrational things.  Let's try to keep our heads clear.  In 12 months time, when First Solar is trading at $200, we would likely ask ourselves, why didn't we buy more when the stock was at $120?

Quick Comparison: First Solar (FSLR) vs. JA Solar (JASO)

JA Solar (Ticker: JASO) impressed investors today with its earnings report and its stock was given a nice 6% jump.  I was a little less impressed.  Here's why.  I am a big fan of huge gross and profit margins.  Why?  Large margins indicate one thing: a huge moat!  People are willing to pay a premium for the product relative to the cost of the product.  Ok, so you say, what's the big deal about profit margins anyway?  A company can still make money and grow revenues/profits even with low margins.  Yes, that is true, but the safety factor for companies with small margins is small.  Let's do a quick comparison.

First Solar 2011 Q1 Results
Revenue: $567 million
Gross Profit: $260 million
Gross Margin: 45.9%
Operating Margin: 20.4%

JA Solar 2011 Q1 Results

Revenue: $556 million

Gross Profit: $96.3 million

Gross Margin: 17.3%

Operating Margin: 15.0%

You can see that both companies made about the same amount of revenue, but the gross profit of First solar was more than double that of JA Solar.  This essentially means that the selling price of JA Solar's products were just a bit above that of its cost.  The one big risk that everyone talks about in the solar industry is falling average selling prices (ASPs).  It means that because many companies are ramping up production, the supply of solar cells/panels will exceed the demand.  As a result, the price of the cells/panels drop.  Because First Solar has a large gross margin, it is more insulated from dropping prices.  If ASPs dropped by 15%, you can bet JA Solar will be losing money.  First Solar may still be able to make money, but just less.

It is a little unfair to do this comparison, however, because First Solar makes panels and JA Solar makes cells.  Solar cells are essentially commodities and are typically a low margin business.  I guess this makes my point even stronger.  First Solar has proprietary technology that lowers its cost significantly.  However we spin it, First Solar's business is superior to that of JA Solar's.

Another interesting point...JA Solar has a very, very low SG&A component, about 2.3% of revenues (gross margin minus operating margin).  The company used only $12.8 million for sales, general, and admin expenses in the quarter, which is suspiciously low.  I'm wondering if there are any accounting tricks that were used.  You can compare this with First Solar's $145 million.  While this is high, it seems much more reasonable.

All in all, it is no surprise that JA Solar's P/E ratio is at a low 4.0.  Investors know this is a risky play.

Volatile Stock: First Solar (FSLR)

First Solar reported earnings earlier this week.  They beat estimates by about 15%, but investors weren't pleased with the outlook, which was the same as their guidance last quarter.  Talk about illogical!  Mr. Market is having big mood swings.  It was less than 3 months ago that the stock hit $175.  Now, it's $128.  This, ladies and gentlemen, is volatility for you!

Take a look at their earnings press release and also earnings call transcript.  I got a sense that Q2 will be another tough quarter, but sailing should be smoother in the second half.  Be prepared for a bumpy ride for the next few months.  On the bright side, some positive outlook they've given include 3.0 GW capacity by end of 2012 and cost per watt down in the $0.52 to $0.63 range by 2014.  This means their capacity would be doubled of what it is today in about 18 months.  In the meantime, I am planning on selling a naked put and maybe also buying some shares (both are bullish positions).

True Religion (TRLG) Explodes (In a Good Way)!

True Religion (Ticker: TRLG) released their quarterly earnings today after market close.  You can read its press release for the details.  It beat estimates by 38%!  Are you kidding!?!  Analysts estimated that it would earn $0.26/share, but it ended up making $0.36/share.  The quarter was really a blowout...just incredible!

Management had set up the business for success.  It opened up new stores and invested in advertising for their web store.  This was done because this was their highest margin segment (gross margins of 72.2%!), US Consumer Direct.  Conversely, they began to scale down the lowest margin segment, US Wholesale.  We can now see the fruits of their work.

Going forward, I'm feeling pretty good about the stock.  I believe a P/E ratio of 20 or even 30 can be sustained by the current growth of the company.  I will start to scale out of the stock as it continues to rise into the $30s, and then buy back at lower prices.  With its volatile nature, I would not be surprised if it were to come back to the mid-to-high $20s at some point.

One more thing I wanted to show you was a tool called Google Insights.  I use it as a tool to predict the current quarter's performance of companies which sell consumer products.  When you enter a search term, Google returns a chart that shows the search volume of that particular term.  Since True Religion is a term that would be searched by the masses, it would give a fairly good indication of how well its business is.  I've embedded a chart of the search volume for the term "true religion" below.  If you look at the history of True Religion's earnings, there is some correlation between it and this chart below.   Try it out!  See what you get when you type "iphone", "android", and "garmin".  Chances are, the company's stock performance has some correlation with the search volume of its products!

Just in case you're wondering why I wouldn't use this tool for other industries...it's quite simple.  The number of searches don't necessarily correlate with its sales.  For example, I work with lasers at work.  I wouldn't use this tool to predict the performance of the laser maker, IPG (Ticker: IPGP), because the number of searches don't really correlate with its sales.  If you're curious, check it out.  The Google Insights chart for "IPG" does not correlate at all with its earnings or stock price.  However, for consumer products, if the masses are searching for a product, it's likely that they are going to buy that product.  Not so much for other industries.

Google Hammered! Here's Your Chance!

Yesterday, Googled delivered another impressive quarter.  Non-GAAP EPS rose from $6.76 a year ago to $8.08, a 19.5% year-over-year growth.  I won't go into the earnings report too much, but investors didn't like 2 things.  First, it missed Wall Street's average estimate of $8.10/share by 2 cents (or 0.25%), and second, more importantly, costs have risen more quickly than revenue has.

In my opinion, those who are dumping the stock have missed the point.  If the costs had eroded earnings so much that earnings had dropped instead of rising 19.5%, I would have hammered the stock too.  The street has gotten used to Google blowing away estimates that anything less is now not enough.  It's a little weird, because if the street is expecting Google to crush estimates, then there's something wrong with the estimates themselves, no?

In any case, I'm getting my cash ready.  I'm going to wait a couple of days until the dust settles.  If the stock quickly bounces back to its pre-earnings level, so be it, I've missed my opportunity.  However, I do foresee some downward pressure in the upcoming days.

Update of Portfolio: True Religion (TRLG)

Over the next few posts, I will be reviewing the various stocks that I have in my holdings, since they all have reported on their 2010 Q4 results.  For now, you can check what my trading activity has been.  Clicking on "Felix's Trading History" at the top right will bring you there as well.

I will be starting with True Religion (Ticker: TRLG), the highlight of the week.  If you have been following this blog for the past year, you would know that I have been accumulating this stock.  I started buying the stock in April of last year, at $29.  I started with a small amount and planned to "scale" into the stock (as Jim Cramer would call it).  In essence, if I wanted to buy $10000 worth of a certain stock, I would buy, say $2000 worth each time.  If the stock dips, I would buy more.  If instead the stock rises, then good for me, I've made some money, but I wouldn't not buy until it dips.  The stock got punished, in my opinion, unfairly, over the course of the last 10 months and bottomed at $17.50.  I continued to buy as it went down.  The stock started out making up about 3% of my portfolio to being more than 20% now.  I even started to sell naked put options because I was getting bullish about the stock and wanted to make good use of my margin account.

Yesterday, I was rewarded.  True Religion reported Q4 earnings that beat estimates and the stock rose by 19% in a single day, to $25.07.  My average cost was $22.55.  A few lessons learned (even though there surely will be more lessons ahead): i) if you are fairly certain of your analysis and prognosis, then trust it, even when the market says otherwise, ii) accumulating a stock is a sure way not to miss a big jump in a stock, iii) the market is sometimes not very logical.

Let me elaborate on lesson #iii.  First, the Q4 press release was not stellar.  The results were good, but guidance was a little soft.  In 2009, True Religion made $1.92/share.  In 2010, that number dropped to $1.86/share.  They forecast $1.80/share for 2011.  The trend is definitely not something an investor would like to see.  But the stock got bid up 19% anyway.  Of course, earnings is not the whole story, and for True Religion, it isn't, but usually, the market should have reacted opposite to how it did.  So, this reaction has not been expected.

But was the reaction a correct one?  Was the 19% jump justified?  Absolutely!  The stock had been hammered for a long time and it was much undervalued.  Remember how I got in at $29?  I thought $29 was undervalued; imagine what I felt at $17.50!!  I believe a lot of the investors saw the revenue growth, which was by leaps and bounds ($311 million in 2009, to $364 million in 2010, to projected $405 million in 2011), and same store sales growth of more than 7%.  The expansion plans look good with 23 new stores opening in 2011, most in the US and a handful in international cities.

The only "bad" number in the report was that SG&A was up, which hurt earnings and will continue to hurt earnings in the coming year.  This is the cost incurred by setting up stores and offices in international locations.  These are growing pains, which are necessary to ensure sustained growth.  I like how management is "biting the bullet" and would rather take an earnings hit now, than to sacrifice growth potential in international markets.

I've embedded a Rule #1 analysis spreadsheet for True Religion below.  The sheet does not reflect Q4 numbers, but is close enough to give a somewhat accurate sticker price.  I've assumed a P/E ratio of 20 in calculating the sticker price.  The stock is still undervalued!

Figure 1: Rule #1 Analysis of True Religion (TRLG)

Since True Religion already makes up a good chunk of my portfolio, I do not plan on adding to my position.  I will be in a holding pattern for the stock in the coming months, and potentially be selling more put options.  I particularly like selling options for True Religion because the options are priced fairly highly compared to the stock price, which is due partly to the high volatility of the stock.  For a Rule #1/value investor, volatility is actually a friend.  One would buy at dips and sell at peaks.  For me, I would also sell put options at dips.

In short, the company is in good shape.  It's selling products at high margins, has a good expansion plan, and its stores are far from saturation in the US, and especially in international markets.  Best of all, the stock is priced nicely, where you can still get some margin of safety.

True Religion 2010 Q2 Results - More Detailed Analysis

So, did you read the True Religion Q2 press release and call transcript like I suggested?  No?  That's ok.  I'm going to give you some highlights in this post.

First off, TRLG missed analysts' estimates for quarterly earnings.  They came in at $0.30/share compared to analysts' estimate of $0.46/share.  This is how the market gauges the stock, and as you can see, the stock dropped an easy 6% the day after earnings were reported.  That's ok.  We don't need to sweat it yet.  So, let's look at  the relevant details.

Earnings Per Share

In Q2 of 2009, TRLG earned $0.45/share.  In 2010, it earned $0.30/share.  What happened?  At the top of the press release, a separation cost of $0.12/share was stated.  What the heck is that?  Well, the former president of the company, Michael Buckley, decided to quit to "pursue other interests".  Lucky guy, 'cause he negotiated a $4.5 million deal if he were to quit the company!  What?  I'd quit too if I were him.  That is simply ridiculous.  You get paid because you decide to quit??  Unfortunately, these deals are ubiquitous for many company executives.  It is a way to attract talent, if you will.  I absolutely do not agree with it though.  It's like me going to my boss and saying, "OK, I quit...now give me $100K for it."

Anyway, taking out this "one-time item", the EPS was $0.42.  Therefore, there was a decline of $0.03/share.  We typically want to see an increase in EPS.  This is a cause for concern.  Let's dig deeper.

Revenue / Top Line Growth

If you read the press release, you can't actually find the word, "revenue", as it is more commonly used.  What you do find a lot is the term, "net sales".  It is essentially the same thing.  Net sales is simply revenue minus any discounts or returns.  For Q2, net sales increased 14% over the same quarter last year, from $72.1 million to $82.2 million.  More importantly, we want to note that net sales for the U.S. Consumer Direct segment saw increased sales of 47.2%.  This is very significant.  True Religion splits its sales into 4 segments.  First, there is the US consumer direct segment, where it sells its products through its own True Religion branded stores and its website.  Second, there is the wholesale route, where the company sells its products to department stores, boutiques, etc.  Third, all sales outside the US are labeled as "International" where the sales may come from a True Religion branded store or through other venues.  Lastly, there is the "Other" segment, which is the money it makes through licensing its products.

The US Consumer Direct segment is performing the best out of all 4 segments.  If you scroll down to the "Q2 2010 Segment Results", you will see a table that shows the net sales of the 4 segments.  US Wholesale saw a decrease of 16.7% and the International and Other segments saw an increase of 14.1% and 16.6%, respectively.  So, the US Consumer Direct segment absolutely blew away all of the other segments.  Why is this important, you ask?  For one, US Consumer Direct makes up about 50% of total sales.  Second, this is reflective of the success of True Religion's expansion plan, that is, opening up stores all around the US.  Third, the efficiency of their sales has increased.  In the call transcript, Jeff Lubell (CEO) tells us that in Q2, there were 82 stores compared to 59 stores last year.  That is a 39% increase in number of stores, and yet, the net sales grew by 47%.  This was helped by increased same store sales of 6.7%.  This means that wherever True Religion opened up stores, they were able to generate increased revenues.  The market has not been saturated yet.

The US Wholesale segment was disappointing in that it actually decreased.  Lubell blamed this on the major department stores.  While it is not an excuse, it is easy to understand why large department stores would buy less of True Religion's products.  In a relatively weak consumer market, the more expensive and luxurious items would be the first to go.  This is not because people do not want True Religion products (the US Consumer Direct segment performance disproves this), it is simply the decision of the department stores to buy less.

All in all, the top line growth was not bad.  The strength of the US Consumer Direct segment shows the strength of True Religion's brand moat.

Why Did Profits Go Down Then?
Since EPS did decrease by $0.03, the money must have gone somewhere.  Was it because True Religion had to sell their jeans and products at a discount to attract consumers?  Let's take a look.  The best way is to look at the gross profit.  It came in at $52.7 million, or 64.1% of net sales (this is the gross margin).  Gross margin actually increased from last year's 62.1%.  Gross profit is simply the revenue generated minus the cost to produce the goods.  Therefore, True Religion actually made more money per pair of jeans.

What happened was that the operating margin had decreased, and it was significant.  Operating costs includes the cost to Sell the product, other General and Administrative costs (SG&A), and other operating expenses such as capital expense and costs to open up new stores.  Operating margins fell from 24.9% in 2009 to 20.1% in 2010 (if we include the separation cost, the operating margin would have been 14.6%).


So, in the end, is this a cause for concern?  I would say, yes, it is, but only slightly.  Management should have done a better job in controlling costs.  However, as a young company in its fast growth phase, I would say it is acceptable.  I would keep my eyes on their margins in the future quarters to see how well management deals with the company's growing pains.

The Future
I believe True Religion will have no problem expanding in the US.  The brand has reached the point of critical mass where it is no longer a fad.  The company plans to open up 12 more stores in the US in 2010, which is 15% more stores in 6 months.  That is an encouraging number.

The more important development is over in Europe (see Michael Egeck's comments in the call transcript).  True Religion, together with UNIFA Premium, has started a joint venture in Germany.  This is a great move.  As we saw above, much of the operating margin decrease resulted from increased operating costs, i.e. expansion costs.  UNIFA Premium is True Religion's international distributor, and therefore, is well entrenched in Europe.  They would be able to expand in Europe much more efficiently than if True Religion did it all by themselves.  There are plans to open a few more retail stores in the Germany region.

The stores in London and Japan are both performing above expectations.  This is another good sign.  These are the frontiers in the international market, and if the products are well received here, it is likely that expansion into these areas will be successful.  The Toronto store will open later this year, and I hope to be able to check it out personally.  For those of you living in Toronto, it's opening up in Yorkdale mall in the Fall.

The Technicals

Is there concern over the short term of where the stock is going?  Yes.  TRLG is forming what is called a descending triangle.  In general, this is a bearish sign, and if the stock breaks through the support of $21.50, the stock will likely head lower.

The Stock is Down...Buy More!
So, is this a concern for us?  NO!  After my long-winded post, I hope I have shown you that True Religion's fundamentals are still intact and it is a great growth story.  We don't know if the price will break through the support, but if it does, we want to buy more!  This is the strategy that Phil Town outlined in his second book, Payback Time.  Because we know the company has solid fundamentals, we know the value of the stock is higher than its current price.  The lower the stock goes, the happier we are.  Who would not buy a $10 bill at $5, right?

Will it happen?  I'm not so sure.  At $22, the P/E ratio is less than 12.  Analysts estimate that the company will grow at 22.5% per year in the next 5 years.  Do the math and you will figure out that the earnings will accumulate to the market capitalization of the company in less than 6 years (this is Phil Town's "payback time").  It is literally screaming, "BUY!!"  And so, I leave you with that!

True Religion 2010 Q2 Results - Quick Comments

True Religion (Ticker: TRLG) reported Q2 earnings today after market close.  The results weren't as stellar as I had hoped, but were still respectable nonetheless.  I will go over some key points with you in an upcoming post.  For now, here's what you need to read: i) True Religion's press release, and ii) Q2 earnings call transcript.  The former is what the company wants you to get out of their results.  It is a condensed version and often the description details what they want to tell you.  If management is hiding something or purely unethical, they would present only the bright side of the story.  So, take it with a grain of salt.  However, the numbers are there in the press release and they don't lie (usually).  That is probably the more important part.  The latter link is a transcript of what was said during the conference call.  The actual audio file can be found on the company's investor relations website and is usually more telling, because you can hear the tone of voice of each of the speaker, but reading a transcript is quicker and usually sufficient.  You will be able to pick up a lot of the nuances that are not readily available in a press release or a financial statement.

So, enjoy these for now...and also the above picture of my wife, Renee, and me at a True Religion outlet store at the Woodbury outlet mall in New York.

It's Going to Be a Good Q3 Earnings Season

This post is strictly a display of the engineer coming out of me. As a mechanical engineer, I'm fairly familiar with how statistics are used to estimate something. It's called statistical sampling. I'm sure you've heard of it before, but you may not have realized. It comes up every few years in a democratic state...how? Well, it's all in the polls. When an election comes up, polls are taken and each candidate or party is assigned a percentage of the votes predicted. For example, you will hear that the polls predict Candidate A will win the election, with the poll being right 19 times out of 20.

A Brief Lesson on Statistics

It all sounds a little unintelligible...how is it done? Well, as you might have guessed, the polls don't actually go to every single house in the riding and ask every eligible voter who he/she is going to vote for. The poll goes around and takes a random sampling of voters, say 1000 of them. Out of the 1000 voters, their opinions will give a picture of how the election will turn out to be. Assuming a normal distribution (bell curve), the poll will use what are called confidence intervals. In our case, it would be 95% confidence intervals, hence 19 times out of 20. Basically, the poll gives say Candidate A 45% of the vote. The 95% confidence interval can be42% -47%. Because it was only a sample of 1000 voters, the actual vote could vary between 42% - 47%. And we are 95% confident that this interval captures the right percentage.

So What?

So, why am I bringing this up? How does this apply to Q3 earnings season? Remember, you heard it here first. I'm using statistical sampling to predict how the entire Q3 earnings season will turn out. Using Yahoo Finance (http://biz.yahoo.com/z/extreme.html), I'm able to see which companies have beat, met, or missed earnings.

From Oct 5 - Oct 14, 37 companies beat earnings and 10 missed. The proportion is 78.7% beat earnings. This is a small sample of the companies that have reported, but we can estimate what the 95% confidence intervals are for the entire season. The confidence intervals can be calculated with the following equation:

For those who want to learn what the heck this is, you can visit wikipedia at http://en.wikipedia.org/wiki/Binomial_proportion_confidence_interval. Anyway, the intervals turn out to be from 67.0% - 90.4%. What this means is that we can be 95% confident that by the time Q3 earnings is done and over with, 67-90% of the companies will have beat their earnings estimates. So, up to 9 out of 10 companies could beat earnings this season! This is HUGE! Even if the final outcome is on the low side, two thirds of the companies will have beat earnings. This translates to an awesome earnings season to me! With this estimate, I'm quite willing to keep my money in the market!

We can continue to monitor and improve our estimates as new data comes out. By 12:30 pm on Oct 15, 93 companies have beat and 20 have missed. The proportion is now 82.3%, which is right inside our initial prediction. With the larger sample size, our new updated intervals are 75.3% - 89.3%. So, we're definitely on a good track to a good earnings season.

But...

There are some caveats. The market is ever changing and so are earnings estimates. Market analysts are free to change their estimates as they continue to observe the earnings that are coming out. So, their estimates may drift up or down depending on how other companies are doing, which means this method is not totally accurate!

As well, our sampling may not be randomized enough...So, be careful when using this method. Having said that, I am still predicting a good earnings season, which would logically result in a good market!