Some Recent Changes in My Portfolio

Finally got some time to update my trading history page.  Bought some Google and First Solar since end of April.

Google
Is there any indication that Google's business is declining?  There's one answer to that question: No.  The main reason is that the Internet is still growing.  According to Internet World Stats, the Internet's penetration of the world is still only at around 30%.  That's a long way to go to get to probably around 85%, where I think saturation will take place.

What's more important is that the Internet is reshaping the way the world operates.  Not only will the number of users increase over time, the amount of money to be made on the Internet will continue to grow.  For example, online video streaming is only in its infancy.  Think Netflix and Youtube.  They have been around for less than 10 years, and Blockbuster has become the first casualty.  I have no doubt that cable TV as it is will disappear in about 20 years.  People will still need to be entertained, but likely through some form of Internet service.  This is the megatrend of the 21st century, ladies and gentlemen.  By owning Google, you will be able to participate in this mega-growth!

First Solar
Renewable energy, another megatrend in the making.  First Solar is the lowest cost solar panel maker, and also one of the largest in the world.  Lots of profits and lots of cash, what more can you ask?  Thanks to the Japanese Tsunami, nuclear has lost its popularity as an alternative to fossil fuel power generation.  There will always be naysayers, but solar energy has already reached critical mass.  Again, own this company and you will ride the wave.

Do You Have the Guts?
Half of the battle is finding the courage to buy the right stock.  Anyone can feel good buying a stock that has just gone up 50%.  But those who make money are the ones who have the guts to buy a stock after it has gone down 50%.  Of course, you need to know that it's a good stock in the first place.  Warren Buffet opens his wallet most often during times of calamity, when stock prices are driven down.  You should learn to do the same.  In order to have the guts, you need to have the conviction that your picks are good.  Rule #1 Investing can help you do that.  Start your journey here.

Rule #1 Analysis Blitz #6: First Solar (FSLR)

I'm back!  After being sick for several weeks, I am now pretty much fully recovered.  It appears that the flu virus is especially strong this year.  I know a couple of people who took about 2-3 weeks to recover.  It really teaches one not to take a good healthy body for granted!

Up until now, I have analyzed both good and not-so-good companies in my Rule #1 Analysis Blitz.  What I have not included were stocks that I actually owned.  Obviously, I try to follow my own rules and buy only stocks that pass my own requirements.  So, first up, First Solar, my favourite solar panel manufacturer.  I've talked about this stock before, but never really showed you my analysis.  So, here it is, my Rule #1 analysis on First Solar (FSLR).

Before I begin, a useless random fact...the panels in the image I used above are not First Solar panels.  How do I know?  The give-away is in the texture of the solar cells.  You can see small dots of brighter reflection, which indicate that these cells are made from polysilicon.  As you'll soon find out, one of the reasons First Solar is doing so well is precisely because it doesn't use silicon to make its solar panels.

Some Background on Solar Panel Technology

Solar photovoltaics have been around for many decades now.  First, what are they?  They are solar cells that convert light into electricity, just like those found on your handheld calculator.  I can't remember when solar cells began to power them, but they were definitely around when I was a kid in the 80s.  Although solar photovoltaics have been around for a long time, their cost have been prohibitively high to be used to generate electricity on a large scale...until now!

There are 2 major types of photovoltaic cells: traditional crystalline silicon and thin-film.  The majority of solar panels produced today uses the traditional silicon technology.  Manufacturers take silicon, melt it down, and form a large silicon rod, called an ingot.  The ingot is then sawed into thin pieces of silicon wafers.  The wafers are fractions of a millimeter thick.  So, if you imagine that you had to cut a loaf of bread into very thin wafers, you will waste a lot of bread because you knife is thick and you'd cut off a lot of crumbs.  This is effectively what happens when the sawing occurs.  These thin wafers are also very fragile and often break during the subsequent processes that includes soldering wires onto them, laminating them between two pieces of glass, etc.

The thin-film technology is a much more streamlined process.  Instead of forming a large ingot and then cutting it into thin pieces, a large glass panel is the starting point and the semiconductor compounds are deposited onto the glass using vapour deposition.  The layer of semiconductor is less than 0.050 mm thick, compared to a silicon wafer of about 0.200 mm thick.  This technique also wastes very little of the semiconductor, unlike the sawing process for silicon wafers.  In short, the thin-film technology is significantly cheaper than the tradition silicon process.  One downside is that the efficiency of the cells, how much sunlight gets converted into electricity, is lower.

First Solar is arguably the most successful thin-film solar manufacturer in the world.  Applied Materials, which began selling thin-film "factories in a box", a few years ago have effectively ended their solar business.  The largest solar players out there now, Q-Cells, Suntech (Ticker: STP), Trina Solar (Ticker: TSL) all use traditional silicon technology.  Sharp Solar is pretty much the only thin-film manufacturer out there that is comparable to First Solar.  First Solar is the lowest cost manufacturer in the world at $0.77 per watt.

Moat

You can download the completed Rule #1 spreadsheet here.

Before we begin, we should note that First Solar is a relatively new company.  It was founded in 1999 and became a public company in late 2006.  In normal instances, Rule #1 investors look for companies with a longer history that is consistent.  However, I made an exception just because I think First Solar is a great company.  Let's take a look why that is the case.

The first few years of the companies are really irrelevant, in our case.  It was a startup and management was just trying to figure out things like developing its product and build factories.  It was a time of expansion and rapid consumption of capital.  So, let's take a look at its more recent history

The Big 5 numbers in the summary table is not of much value this time, because the longer term numbers are fairly inconsistent.  I've added a second figure with sales, EPS, BVPS and free cash flow numbers of the past 10 years.  Just taking a glance of these numbers for the past 4 years, you can see that there is explosive and consistent growth in pretty much every category.  The only concern is that free cash flow has been a little inconsistent.  However, there is a good explanation for that.  If you look at cash from operations, the growth has been very steady.  The only thing that is hurting free cash flow is capital expenditures, which is essentially the cost to increase production capacity or building new production lines.  That is expected of a company that has expanded production to more than 1 GW of solar panels sold in 2009.

The moat that First Solar has is in its cost structure.  Because of its successful thin-film technology, cost per watt has gone below $1.00 per watt, which has not been achieved by any other solar manufacturer.  And this was achieved by First Solar back in 2009!  Other Chinese manufacturers are gettting close to this $1/W milestone, which is thought by many as the grid-parity value (i.e. the cost of panels to make cost of solar energy to be the same as traditional energy generation methods).  This is very important because solar panels are essentially commodity items.  Like potatoes or oranges, customers don't really look for brands of these products and their buying decision is largely based on the cost of these items.  If you look at Walmart, the world's largest retailer, it sells commodity-like items but at a cheaper price than most other competitors.  Its cost moat is the reason why they have been so successful.

The demand of solar products is currently so high that other less efficient manufacturers can still sell their products at a profit.  As solar supply increases, the selling price of panels will decrease.  Inefficient manufacturers will either need to decrease margins and potentially even sell at a loss or risk not selling any panels at all.  There will be a fallout of these companies.  What will eventually happen is that a few larger players will survive during this consolidation of the industry.  First Solar is in a good position going forward.

Because solar panels are commodity items, unless First Solar continues its leadership in low cost manufacturing, it will lose out to other manufacturers.  There is no reason why customers would want to buy First Solar panels if theirs were more expensive.  For this reason, it gets a couple of points docked off for Moat.  It gets an 8 out of 10.

Moat Score: 8 / 10

Figure 1: Rule #1 Analysis of First Solar (FSLR)

Figure 2: Rule #1 Analysis of First Solar (FSLR) - Continued

Margin of Safety

First Solar has been growing EPS at greater than 50% in the past few years.  For 2010, it will likely slow to about 20%.  There has been a lot of concern about shrinking margins at First Solar, but I believe these fears are overblown.  In any case, I believe EPS growth can probably continue at the analysts' estimates at about 23%.  The historical P/E ratio of 19.4 was used.  These assumptions give us a sticker price of $277 and entry price of $139.  The stock sits at $135 at time of writing.  It looks like we have adequate margin of safety to buy this stock.

Because of its high estimated EPS growth, payback time is a mere 7.2 years.  I'm really liking this!

Since the EPS estimates are fairly high at 23%, I will take a few points off.  First Solar gets a 7 out of 10 in Margin of Safety.

Margin of Safety Score: 7 / 10

Management

Robert J. Gillette is the current CEO of First Solar.  He's only been at the helm for a bit over a year, replacing Michael Ahearn.  Prior to leading First Solar, Gillette was CEO of Honeywell's Aerospace division, which was the largest division in the company.  Gillette has a pretty good track record.  After a year as CEO, Gillette continues to drive growth at First Solar.  He has plans to expand capacity to 2 GW by end of 2011, which is nearly double of what it is in 2010.

Since his tenure at First Solar, Gillette has bought 10,000 shares of First Solar at $104.63.  The stock now sits at $135.  It is usually a good sign when an incoming CEO buys a significant amount of shares.  He is putting his money where his mouth is.  I remember when the CEO of my company, ATS, Anthony Caputo came onboard, he bought a large number of shares.  Since his arrival, our stock has risen from under $4 to about $7.

In a recent conference call, Gillette explained that the company's goal is to seek long term growth, which means that margin contraction would likely occur.  Why is that?  They must price their products accordingly to achieve market penetration.  Many times, companies that are first to market gain a large percent of market share.  Ebay is a perfect example of this in the online auction business.  The riskier and the correct path for the company would be to make investments up front.  As I mentioned above, the industry will go through a consolidation phase as the technology progresses.  That has already begun to happen.  My prediction is that smaller, non-profitable players, like Evergreen Solar (Ticker: ESLR), will go bankrupt within a few years.  As long as earnings continue to grow in absolute terms at First Solar, I believe a little margin contraction is not an issue at all.

I give Gillette an 8 out of 10.

Management Score: 8 / 10

Meaning

First Solar has tremendous meaning to me.  As long as I could remember, I found renewable energy very interesting.  In my highschool days, whenever I had science projects, I would pick topics like fuel cell technology, automotive hybrid technology, etc.  I foresee a future of clean and sustainable energy for the world.  It is only a matter of time before that happens.  Our generation is just like that of 100 years ago.  We are going to see a whole paradigm change.  100 years ago, the automobile changed the lives of everyone on the planet.  100 laters, sustainable energy will be that life-changing technology.

We are also stewards of this Earth.  We are now at a stage where if humanity continues its path of burning fossil fuels, we will destroy not only our environment, but civilization itself.  Investing in renewable energy is one of the more ethical decisions you can make financially.

First Solar has a number of manufacturing plants in Malaysia and Vietnam.  Many people think of sweatshops when Asian factories come to mind, but if you have every visited a photovoltaic manufacturing facility, you would think you have entered a futuristic world.  The working conditions are clean and brightly lit, and operators have to been in good working conditions since product quality is of top concern.  Sweatshops and photovoltaic manufacturing facilities could not be any farther apart in the spectrum of manufacturing plant conditions.

Solar energy will drive the economy in the coming future.  We will see that more and more in North America. Ontario has already begun to adopt the government subsidy programs that have made Germany a solar powerhouse.  By investing in solar energy, you are investing in the well-being of the world economy.

One last point about First Solar is that it uses cadmium, a toxic material, in its solar panels.  Although it provides panel recycling services, there will be instances where customers will be negligent.  I can foresee potential problems caused by the use of cadmium.  Having said that, this problem can largely be controlled.  The benefits of the panels offset the toxic materials in a significant way.

First Solar gets a 9 out of 10 for Meaning.

Meaning Score: 9 / 10

Summary

Moat Score: 8 / 10

Margin of Safety Score: 7 / 10

Management Score: 8 / 10

Meaning Score: 9 / 10

OVERALL (not an average): 8 / 10

The weakest point in First Solar is in margin of safety.  It needs to sustain a high growth rate for our numbers to be justified.  However, I have put my money on First Solar.  The sustainable energy megatrend will help First Solar realize these growth rates and it is not far fetched to believe that First Solar could become the Exxon Mobil of the future.  If First Solar has meaning for you, definitely use this as a starting point of your research.  Good luck!

First Solar Plans on Doubling Capacity

Just read this press release from First Solar...They announced additional expansion plans, which will bring their capacity from 1.4 GW this year to 2.7 GW in 2012.  That's 93% increased capacity in 2 years, or 39% per year.  Even if their margins erode, it's kind of difficult to not increase EPS significantly.

One thing that is important when you see this type of expansion plan is how well the company will execute.  Some times the best laid plans do not go as expected.  However, for First Solar, their past history has been nothing short of spectacular.  The company has been in existence for 11 years, and has become one of the biggest panel makers in the world, while making tons of money in the process.

As I have said before and will say again: renewable energy is the next megatrend.  Don't miss out!

Renewable Energy: The US Secretary of Energy is Onboard!

As you know, I'm away in Los Angeles this week.  My company actually sent a coworker and me to attend a laser conference, ICALEO, that's taking place here.  There was an awards ceremony today and the US Secretary of Energy, Steven Chu, was the recipient of one of the awards.  He was a recipient of the Nobel prize in 1997 for his work on trapping atoms with a laser (how cool is that?!).  It's not everyday that you're in a room with a Nobel laureate (actually, there were 2 of them, the second being Charles Townes, who invented the maser [precursor to the laser]).

Anyway, I digress...what I wanted to talk about was Dr. Chu's speech.  The first half of it was essentially about how he got to where he is today.  It was a very interesting story, but I won't go into it.  The second part was about America's future.  He talked about global warming and he said that there is overwhelming evidence of global warming, but many people remain unconvinced.  He compared this to how for many years people did not believe that smoking cigarettes was harmful to the body.  Well, they were wrong there...and the unbelievers will be wrong again.  I absolutely agree with what he says, but even if he were wrong, there is something to be learned here.  Here is the US Secretary of Energy talking about the risks of not doing anything to stop global warming.  What policies do you think will result from his stance?  I can bet that he will be pushing for development of renewable energy.

It has become apparent that our world is shifting to one that embraces renewable energy.  If you were a politician, the right thing and the popular thing to say is that you are green and will endorse the shift away from oil and carbon-based energy.  The megatrend has begun!  Don't miss out on this excellent investment opportunity.  By investing in renewable energy, you'd be fulfilling your responsibility as a steward of the Earth.  Don't know where to start?  Go to one of my recent posts on solar energy!

I will leave you with a Native American saying that Dr. Chu quoted in his speech, "Treat the earth well: it was not given to you by your parents, it was loaned to you by your children."

S&P500 Reverse Head and Shoulders in Action

I'm going on a business trip to Los Angeles for a week, flying out tomorrow morning.  So, just a quick one before I leave...

The above chart is that of the S&P500 index.  A reverse head and shoulders pattern has just been confirmed, with the index breaking above the "neckline".  You can expect the index to reach 1230 points as a target.  Note that this is a purely technical indicator and has no fundamental basis, whatsoever.

So, how does it work?  Technical analysis is loosely connected to behavioural economics.  From behavioural economics, we know that people tend to conform to the general populace and is loss averse.  In the case of technical analysis, since investors believe other investors look for technical indicators, they would not want to miss out on this great run, and decides to jump back into the market.  Therefore, the pattern is almost a self-fulfilling prophecy because this new money flowing in drives the prices up further.

Depending on what your outlook on the overall market is, it may be a good time to either jump back in (if you believe the past few months has been a correction), or to take profits/cut losses (if you believe a double-dip is in the works).  What do I think?  I'm undecided until I see the S&P500 breaks above the 1220 point resistance.  Proceed cautiously!

Solar Demand Very Healthy

I'm a big fan of solar energy and I think it's a megatrend in the making.  There are a lot of doubters out there and thus, the whole solar energy sector has taken a beating over the past few months.  Many solar stocks are near their 52-week lows.  There are various reasons for this.  First, Germany is the biggest solar market right now, mainly because its government was an earlier adopter and introduced subsidies early on.  It is now making cutbacks to those subsidies and that has made ripples in the market.  Second, Europe is also the largest solar market out of all of the continents, and we have all heard of the trouble that is brewing in the Eurozone.  So, I don't blame the naysayers entirely.

However, we need to see through this noise.  Look at the megatrend that is forming.  Look at the BP oil spill.  Do you think the world will still want to rely on fossil fuels after this disaster?  Although oil is not directly linked to electricity generation, it is now very apparent that we, as a civilization, can no longer depend on non-renewable energy.  We just had a temperature record breaking spring.  Whether this warm weather is caused by global warming or not, people are starting to associate climate change with usage of non-renewable energy.

I also read two articles that confirm my suspicion, that solar energy is alive and well.  First, First Solar announces that it cannot meet the demand for 2010.  Then, Suntech (Ticker: STP) also makes the same announcement.  These are two of the biggest solar panel makers in the world and if demand is greater than their capacity, then I think overall demand is probably greater than the overall capacity of the total capacity of all solar panel makers.  It's just a hunch, but I'm not afraid to put some money on this hunch.

Anyway, I believe it's a great time to get into solar.  Stock prices are low and upside potential is huge.  Start your research with First Solar (FSLR), Trina Solar (TSL), and Suntech (STP).

Technical Analysis: The Crowd Mentality

The Crowds Around Jesus

During Jesus' ministry, there were many instances of crowds gathering around him.  In the Gospel of Matthew, Jesus started preaching in 4:12, and not long after that, in v. 25 of the same chapter, crowds began to form around him wherever He went.  In chapter 13, the crowds were so large that he had to preach to them from a boat.  In chapter 21, as Jesus was entering into Jerusalem, the crowds laid their cloaks on the group to make a carpet for his donkey to walk on.  However, the crowds were not always on Jesus' side.  During his trial, the Jewish leaders were able to persuade the crowds to have Pontius Pilate release Barabbas, and not Jesus.  Pontius Pilate eventually succumbed to the pressure of the same crowd and condemned Jesus to be nailed to the cross.  These were the same people who had laid their cloaks on the ground a few days earlier!

What was going on?  I would attribute this to the "herd mentality" or "crowd mentality".  Sociologists tell us that people often behave the same way as their peers do.  We know all about that, don't we?  Remember when you were in highschool and your friends all dressed a certain way?  You knew you had to dress that way also in order to fit in.  A few years back, when the show "24" was really popular, a good number of my coworkers talked about it over lunch, and eventually, I got the DVDs.  While it was a good show, the reason for starting in the first place was definitely because I wanted to be able to join in the conversation with my coworkers, and not because of any objective evidence that the show was good.  (By the way, the first 5 seasons were really good!)

Crowds in the Market

It is no different in the stock market.  When others buy a particular stock and drive the price higher, you would likely feel compelled to buy as well, seeing how well the stock is doing.  When the stock is being hammered, you would also want to bail.  It's a little over-simplified, but in general, this is what happens.  Using the past price action of a stock to forecast its future price movement is called technical analysis.  Technical analysis may seem to be very scientific, using averages, standard deviations, regression, etc., but let me assure you, it is an art!  Don't be fooled!

There are a plethora of technical analysis tools available to you, from moving averages to stochastic indicators to Bollinger bands to Fibonacci retracements to MACD (Moving Average Convergence Divergence), etc.    However, in any given day, only 5 pieces of information of a stock is collected: opening price, closing price, high price of the day, low price of the day, and volume of the stock.  Most of the time, the various tools just use the same data in different ways to give seemingly different indications.  In my opinion, it's just the same information.  It's no different whether you use 1 tool or 10 tools in some convoluted combination.  This is where the KISS (keep it simple, stupid) principle really applies.

Which is the Best Tool?

I usually have something like 5 tools/indicators plotted on my stock charts, but when I reflect upon which ones I use the most, I would have to say 95% of the time, I only really look at the exponential moving average (EMA).  A little definition: a moving average is simply the average over a certain period.  So, the 50-day moving average of a stock is simply the average of the closing prices from the last 50 days.  An exponential moving average is one that simply gives more weight to the more recent data.  I like the EMA more than the simple moving average.

Above, you can the graph of S&P500.  By the way, the black and red "bars" are called candlestick chart.  I'm not going to go into candlestick charting here, but a quick google will get you started.  Learn it, it's very useful!  Sorry, where were we?  Yes, EMA!  In the chart above, you will see, in addition to the stock prices, a blue line and a red line.  The blue line is a 30-day EMA and the red line is a 250-day EMA.  The EMA lines can be considered as resistances and/or supports.  You can say that once the stock price goes pass the line, it will be more difficult for it to reverse its motion.  It's kind of like Newton's first law of motion.

With the 30-day EMA, since it is a shorter-term EMA, prices in the short term will find resistance/support.  However, it is not to be used as a long-term resistance/support.  As you can see in the chart of about 18 months, the stock price broke through the 30-day EMA multiple times.  So, I would consider the 30-day EMA a short term tool (unless if you're day trading, then perhaps you need a 30-min EMA).

I really like the 250-day EMA because I don't believe in short-term trading.  My time horizon for any given position can be a few years long.  If you look at the month of July in 2009, S&P500 broke through the 250-day EMA  Since the "strength" of the 250-day EMA is high, it is very difficult for the index to break through unless there is a fundamental shift in the market mentality.  The market is turning from a bearish view to a bullish view.  In February of 2010, the index had a correction and dipped to the 250-day EMA, but once it got close to it, it bounced right back.  This is what we call support.  So, remember, the longer term an EMA is, the stronger it acts as a resistance or a support.  So, it's big news when an index breaks a 250-day EMA!  That's why I'm currently bullish about the market.

If you are a long term investor, like me, then the EMA will get you pretty far.  There's little need for the fancy tools.  However, once you get comfortable with the EMA, it may be wise to explore a little more and see what works for you.  Having said that, EMA has worked well for me.

The one concept that you need to take away from this post is the concept of break out.  Again, I will use the analogy of Newton's first law of motion.  Essentially, Newton says, "If an object is traveling at a certain velocity, unless you exert force on it, it will travel in the same speed and direction forever!"  In the stock market, unless there is sufficient cause for a trend to reverse, it will continue in that direction.  But once you do notice a change in direction (i.e. the breaking out of a stock through an EMA or a resistance/support level), the trend may very well be over.  It doesn't always happen that way though.  The price may break through for a few days and bounce right back to where it was.  So, keep your eye on it when you suspect a break out happening.

Where Can I Get the Tools?

So where can I access these technical analysis tools, you ask?  Yahoo Finance has a pretty good interactive chart.  I also like Stockcharts.com. Either one will be sufficient.

Stockcharts.com also has a good section on chart patterns.  Give that a read when you have time.  From my experience, I like looking for patterns and has typically worked well for me.  I may write a post on that topic, but for now, give Stockcharts.com a read.

Technical analysis is an interesting topic.  Some people swear by it, following their indicators to buy and sell their stock.  Others dismiss it as a black art.  I sit somewhere in between; it's a tool for me to confirm my hypotheses.  Anyway, it is fun to read a chart and be able to find patterns in the apparent chaotic movement of the prices.

It's a little late, but I will wish you a Happy Easter (we're still in the Easter season according to the Catholic calendar, until Pentecost)!  The Lord has risen...enough said!  Alleluia!

Growth Stocks: Are They Safe Investments?

Growth Stocks - A Bad Rep?

In a previous post about fundamental analysis, I talked a little about what I term "reckless investing".  After the dot-com bust in the early 2000s, growth stocks have become somewhat a synonym as "reckless investing".  Why?  In the years leading up to the bust, people believed in the internet revolution, where the internet and e-commerce would change the way of life.  This was a typical "this time is different" mentality.  By the way, if ever you hear someone say, "this time is different," run for your life!  Things will almost always be the same, because human greed (one of the 7 deadly sins) is very, very consistent.  Even renewable energy will eventually turn into a bubble.  Anyway, I digress.  

So, what spawned from the dot-com bust?  People were very afraid of growth stocks...you know, stocks like Google (ticker: GOOG) and Apple (ticker: AAPL)...catch my drift??  So, instead, a lot of people in the US invested in safe investments, like real estate.  As a Chinese-Canadian, I am deeply influenced by my Chinese roots.  One thing that my dad had always advocated was that you can never go wrong buying real estate, because it's something tangible and people always need to live in a home.  Wow...it's a good thing he didn't invest in real estate and live in the Nevada in 2008.  So, fast forward a few years to 2007 and you know something is brewing.  People kept on talking about subprime mortgages...what the heck are those?  I'd like to get a mortgage at rates lower than the prime rate, right?  Sorry, that prime is very different.  Everyone now knows that subprime refers to risky borrowers who are probably going to default if something went bad.  And bad it went!  We all know about that fiasco now after living through what will be termed by historians as the Great Recession.

So, back to growth stocks.  In and of themselves, growth stocks are neither a good nor bad investment.  There are some awesome growth stocks, and there are some very poor growth stocks.  How do you define a growth stock anyway, you ask?  Investopedia gives the definition as, "Shares in a company whose earnings are expected to grow at an above-average rate relative to the market."  I personally like growth stocks because they are typically technology stocks and I'm a geeky guy.  My portfolio is almost entirely made up of growth stocks, and hopefully, I'm not doing some reckless investing!

Can Growth Be Sustained?

Let's take a look at my darling, First Solar (ticker: FSLR).  It's a relatively new company in the solar photovoltaics sector.  It IPOed in 2006 at around $25 and quickly grew 10x in about a year's time.  Holy smokes!  I wish I knew about this company when it IPOed!  As the recession hit, its stock dropped back to double-digits for a while.  Now, it's sitting at around $112 at the time of writing. The question now is: will it become another Nortel (ticker: NT...now non-existent due to bankruptcy)?  There are doubters in the room...I can feel it.  Some, as a result of the dot-com bust, will never put their trust in growth stocks again.

All arguments aside, let's look at a mystery growth stock.  Below, you will see the first 2 years' performance of the stock.  It IPOed at around $0.10 and quickly grew to $0.55 in 2 years - simply spectacular performance.  Then, it hit a bump and dropped back to $0.30.  What is its future?  Is growth sustainable for this company?  Some will argue that the price rose too much, too quickly.  No stock can sustain that type of growth in the long term.  This 45% drop in price is just a signal of things to come.

Ok, this is an investing blog, not a mystery novel.  So, I will save you the suspense.  The stock is Microsoft and the years were 1986-88.  Below is the chart of its entire history.  As we all know, even if you did buy at the "peak" of $0.55 (this price is split-adjusted), you would have made approximately 60x your initial investment if you held and sold in 1999.

What's the moral of the story?  There will be some stocks that will grow, and grow, and grow.  Don't be disheartened if you find a growth stock with a bright future, but is experiencing a pullback.  They may resume their growth in the very near future.  You will need to identify these companies.  For that, see my post on megatrends.  By identifying a megatrend, you can be sure you're in for some awesome returns.

A Tale of Three Stocks

Don't believe me?  Let's take a look at the oil megatrend.  Oil is the single most important energy source of the world today.  To say that it was a megatrend almost does not do it justice.  The stocks of the 3 of the biggest oil companies in the world (Exxon Mobil, British Petroleum, Chevron) are plotted above.  BP has the worst performance, but it matched the growth of S&P 500 in the same time period, which is still fairly good.  Exxon Mobil's growth was simply super.  Investing $10K in 1970 would have resulted in $500K portfolio at the stock's peak.

This again confirms my take on megatrends.  You don't really need to be 100% on your stock selection.  If you can find a megatrend, the successful companies in that industry will benefit, although some more than others.  Of course, finding the best one will give you that extra boost.

Back to First Solar

The funny thing about First Solar is that its stock is getting a beating because...wait for it...the future is uncertain.  What?  When was the future ever certain?  Investors are scared because German feed-in tariffs may be cut, too many solar companies are ramping up, the global recession is still affecting solar projects, yadi, yadi, yada.  Yet, they don't look at the other side of the story.  China is planning on a 2GW solar farm with FSLR as supplier and it is imminent that the US will pass an environmental bill, etc.  Again, when others are fearful, you want to be greedy!

Take a step back and look at the megatrend.  Renewable energy is the future.  There is absolutely no doubt in that.  And you know what the best thing is about that?  It's the fact that by investing in renewable energy, we are fulfilling the stewardship that God has placed on humanity for the care of the Earth.  Investing ethically and making some super returns is one of the best combinations you can get in the world of investing!

Is the Bull Market Over?

There's been a lot of negative talk lately about the market.  First, Obama wanted to proposed a number of reforms to the banking industry, then it seemed Ben Bernanke might not be re-appointed as Federal Reserve Chairman (by the way, he just got re-appointed today), jobless claims and durable goods numbers weren't great, and finally, Steve Jobs showed us a re-sized iPod Touch and called it the iPad.  The market responded by droping almost 6% in 7 tradings (S&P 500 closed at 1150 pts. on Jan 19 and only 1085 pts on Jan 28).

What does this mean?  Is the bull market over?

Maybe...But Not Likely
Before we begin, let's review what the definition of a bull market is.  The most common definition is that a bull market has occurred if the market has risen by more than 20% from the previous bottom.  Conversely, a bear market is when the market has fallen more than 20% from the previous top.

As you know already, I like looking at numbers.  Let's look at some stats.

1. From 1949 to 2008, the average bull market lasted 45 months.  The shortest lasted 15 months.  We are in our 10th month of the current bull market.  So, I would guess there's still some steam left in this bull.  I know these are special times...but I'm sure things looked pretty grim during the Korean War, the Vietnam War, the 1973 Oil Crisis, 9/11, etc.
2. Ken Fisher noted in his book The Only Three Questions That Count that whenever government deficit hits a high, the stock market is bound to do well.  The reverse is also true, that when government deficit declines, the stock market will fare worse.  It sounds a little counter-intuitive, but facts don't lie.  I have overlaid the graph of S&P 500 (red & green) with the graph of the federal deficit of the US (blue).  Obviously, his theory doesn't work all the time, but let's take a look
   - 1968 high spending, followed by 1968 stock market peak
   - 1969 surplus followed by 1970 bear market
   - 1971 peak spending followed by bull market until 1973
   - 1974 low spending followed by 1974-1975 market bottom
   - sustained high spending in the 80s drove the market a long bull market, as with the 90s
   - 2000 peak in surplus followed by 2000-2002 bear market
   - 2003-2004 high spending followed by long bull market until 2008
   
   
   
   So, we should be happy that the government have spent so much of our money!  Sounds kind of backwards, doesn't it?  I'm not the expert economist...so why don't you read Fisher's article on this?  He actually talks about debt, but deficit essentially tells you the direction that debt is going...so we would arrive at similar results.
3. Ken Fisher also notes that bear markets don't occur overnight.  It takes a few months for it to happen.  Don't believe me?  Take a look a our previous bear market.  In July 2007, S&P 500 hit around 1550 points.  It reached that level again in October, but wasn't able to break through by much (this is called a "double top" in technical analysis language, by the way).  Then, the bear market was confirmed in July of 2008 after it dipped 20% below 1550 points (1240 points) in July 2008.  Then the market fell off the cliff in September and October of 2008.  This was more than 1 year after the peak of the bull market!
   
   
   
   What we're seeing now is a correction.  Correction usually occurs quickly and typically has some story behind it to make it look real.  Don't fall for it.

So I Should Buy, Right?

Well, that's always your choice, but I have added to my positions this past week.  As Warren Buffet says, "Be fearful when others are greedy and greedy when others are fearful."  What do the headlines say these days?  Recovery is sluggish...unemployment is still high...national debt is unsustainable...I would say people are still pretty scared right now.  It's when you see people, who have no idea what stocks are about, investing in stocks that you need to be scared.  I don't think we are at that point yet.

I like listening to those who are successful, those who are proven, the likes of Warren Buffet, Peter Lynch, Jim Cramer, Ken Fisher, and Phil Town.  I don't like listening to pundits who are trying to make a living "punditing".  Last time I checked, pundits weren't the best investors around.  If you don't trust Buffet or Fisher, at least trust the numbers.

Spotting the Megatrends

Statue of Roman Emperor Constantine

The Catholic Megatrend

I just finished my fall term course, History of Christianity I.  The scope of the course was the history of Christianity from the time of Jesus to the Middle Ages.  Over this period of time, Christianity grew from a little offshoot from Judaism to become the religion of the West.  One of the major turning points in the history of Christianity was the conversion of the Roman Emperor Constantine.

Just years before Constantine came onto the scene, the Emperor Diocletian in the year 303 A.D. began a period of persecution of the Christians, leading to the deaths of many martyrs.  Only 10 years later, Emperor Constantine reversed this persecution and issued the famous Edict of Milan, tolerating the Christian religion.  Before the end of his life, Christianity was on its way to become the official religion of the Empire.

What does this all have to do with investing?  This is what is referred to as the megatrend.  It is a major trend that brings about profound change in the way the world operates.  An onlooker in the third century in the Roman Empire would have noticed that something was up.  There were these groups of people who had outlandish claims of eating their lord's body and drinking his blood.  Aside from this, they were generally law-abiding citizens who were very charitable.  Their churches would actually provide for the sick and the travelers.  What was certain was that more and more people were joining them.  Everyone knew the world was changing, but some doubted if this would continue.

The pagans who continued to practice their pagan worship were in for a surprise.  In a short span of roughly 50 years, the pagan cult went from being the official Roman religion to becoming nearly wiped out.  It is easy to deny the trend, but the consequences could be grave.  This is the same way with investing.  Once every few decades, a breakthrough in technology or human thinking would change the way the world operates.  If you invest in the right companies at the right time, you're in for a ride of your life!

Some Megatrends of the Past

Let's look at some megatrends that have occurred in the last century.  If you were around at that time and placed a bet on it, you'd be uber-rich by now.  Just from the top of my head, I can think of 2 megatrends.  In the first half of the century was the automobile megatrend.  Needless to say, automobiles are now ubiquitous. However, it was not so in the early part of the 20th century.  By investing in the best-of-breed companies early on (GM, Ford, Toyota, Honda [disclaimer: GM was best of breed decades ago, not 2008 for obvious reasons]), you would have reaped excellent returns.

Another more recent megatrend is that of the personal computer.  Who is the richest man on Earth right now?  None other than Microsoft founder Bill Gates!  Split adjusted, Microsoft (Ticker: MSFT) IPOed at roughly $0.10.  Even after 10 years of lackluster performance, the stock sits at $35, which is 350 times the initial stock price!  If you had put $10K into MSFT in 1986, you would be sitting on $3.5 million by now.  In fact, in 2000, you would have had $4.6 million!  46000% return in a mere 14 years is not bad at all!  That's approximately 55% return annually!

To ignore the megatrend is to ignore super returns!  The good thing about megatrends is that they are easy to spot!

Megatrends of the Future
So, let's look for megatrends of the future!  How do we exactly do that?  Well, it's actually quite simple in my opinion.  It is looking for something that is inevitable and most of the time, it's actually quite obvious.  I'm sure that 30 years ago, everyone knew that computers would eventually replace the typewrite.  It was just a matter of time.  So, ask yourself, what is inevitable?

Jim Cramer has been saying this for some time and this megatrend has just started materializing.  He calls it the "Mobile Internet Tsunami".  It's all about smartphones.  In my previous post on Google, I had already talked about their Android smartphone OS.  5 years from now, all of our cellphones will be smartphones, enabling us to talk on the phone, text message, surf the web, do work, watch TV, listen to music all on the same device.  This megatrend is easier to spot because it has already started to occur.  The Apple iPhone was the first device to bring awareness to the general public.  It is only a matter of time when the iPhone like devices become commonplace.  Cramer suggests investing in Apple (ticker: AAPL), RIM (ticker: RIMM), Google (ticker: GOOG), Qualcomm (ticker: QCOM), etc.

Another upcoming megatrend would be the renewable energy megatrend.  I also talked a little about this in another post.  Global warming awareness is reaching the point of critical mass as the talks in Copenhagen just ended.  I know there's a lot of debate regarding whether global warming is caused by human activity, but that is NOT the real focus.  Regardless of the truth or lack thereof in the global warming hypothesis, governments are turning towards renewable energy.  Perhaps it's not even for saving the Earth.  Maybe Americans don't want to rely on the Middle East, Venezuela or even Canada to hold the key to what powers their country.  Whichever way we see it, it is inevitable that the world will shift to renewable energy.  Is it going to be solar energy?  Wind energy?  Geothermal energy?  Who knows?!  I'd bet it's going to be a combination of all of these, plus more.  The point is that there is going to be a major shift in how energy works in this world, and you can use that to your advantage.

Another favourite trend of mine is robotics (obviously not because I did my master's in robotics and I work for an automation company!).  This is another megatrend, but I think we're at least 10-20 years from the beginnings of that, perhaps even more.  This change, also, will be inevitable.  One day, we will all have a robot in each of our homes and we will no longer need to do chores like washing dishes, vacuuming, etc.  Heck, we don't even need to vacuum now, with the Roomba robots roaming around!  This megatrend I'm talking about is the proliferation of robots and automation in everyday life.  Hints of that have already begun in a company called Intuitive Surgical (Ticker: ISRG).  Surgeons can now perform surgery remotely by use of robotics using their technology.  This is only a start.  In another 10 or 20 years, watch for this trend to materialize!

I will admit: I don't know everything!  :)  There are probably some other megatrends that I have missed entirely, but not to worry, these trends are fairly obvious.  I'm sure you'll be able to spot them when they arise.  Until then, buy a smartphone and start googling for companies developing renewable energy and robotics!