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.
Thursday, April 28, 2011
Wednesday, April 27, 2011
A Flurry of Activity
For those of you who don't know, I publish all of my trades on this page. I don't show the number of shares, but I do show the price at which I bought/sold. Recently, I've been busy buying and selling and my broker is loving it. I've bought shares of Google (GOOG), First Solar (FSLR), Synaptics (SYNA), and sold some True Religion (TRLG) and Garmin (GRMN). On the options side, I've sold uncovered puts for TRLG and SYNA, as I'm bullish on the stocks and wouldn't mind owning some more shares even if they got exercised. As well, I sold some covered calls on TRLG, because I felt that the recent run up could lose some steam. I could be wrong and the shares could be called away, but only after a 28% gain! Either case, I'm a happy man!
I still haven't written about my case for Synaptics, but I hope to do it sometime within the next 2 weeks. It just had a pretty impressive quarter and I'm hyped about this company.
I still haven't written about my case for Synaptics, but I hope to do it sometime within the next 2 weeks. It just had a pretty impressive quarter and I'm hyped about this company.
Sunday, April 24, 2011
Happy Easter!
Happy Easter! Easter is truly the reason for our faith. St. Paul tells us, "if Christ has not been raised, your faith is vain; you are still in your sins" (1 Corinthians 15:17). Even this blog would be in vain. But fortunately for us, Christ is indeed risen! Alleluia!
Tuesday, April 19, 2011
Update of Portfolio: Garmin (GRMN)
Not all things are rosy in my portfolio. I've had some losing positions over the years and this post will be on one of them. It is the very familiar name, Garmin (Ticker: GRMN). If you don't know what they do, they are one of the major GPS makers (alongside TomTom).
I had started my position in Garmin when I first started reading Rule #1 back in 2008. Phil Town liked the stock and I was a Garmin user myself. I ran some numbers and thought that the company was on solid footing. I started buying as it fell to $40 from $120. I thought it was an excellent price. I continued to accumulate and had a sizeable position, with an average cost of about $37. As the financial meltdown took its course, Garmin fell all the way to $17. If only I had cash left at that time, I would have bought more.
Fast forward a few years, after getting paid $1.50/share in dividends and making a small amount in Garmin options, I exited the stock at around $33.50. I bit the bullet and took a loss, because I looked at my other holdings and realized that my money was doing not much work in Garmin and the potential for growth was smaller than the others (i.e. True Religion, Google, etc.). All in all, I lost a couple of bucks per share, but the higher costs was really the opportunity cost.
Garmin's Brief History and Current State
Let's look at how Garmin is doing these days. If you flip through the Rule #1 analysis below, you can see that there's some missing data in MSN Money, but the data that do exist are telling. Every was rosy until about 3 years ago. This was when the financial crisis hit and the smartphones started to take off.
Since many people had bought a car GPS by then, the market was beginning to saturate. Overall growth in the company became stagnant. It also flopped on its venture into the smartphone space. In my opinion, it failed not because it did not have a good strategy, but because of poor design choices. The strategy of using Android as the platform was sound; HTC has become a major force in the smartphone world by adopting the Android OS, so it could be have been done. The failure stemmed from the lackluster hardware specifications that the Garmin phones had. Garmin's phone specs could not match those of the likes of Motorola Droid and HTC/Google Nexus One.
I had started my position in Garmin when I first started reading Rule #1 back in 2008. Phil Town liked the stock and I was a Garmin user myself. I ran some numbers and thought that the company was on solid footing. I started buying as it fell to $40 from $120. I thought it was an excellent price. I continued to accumulate and had a sizeable position, with an average cost of about $37. As the financial meltdown took its course, Garmin fell all the way to $17. If only I had cash left at that time, I would have bought more.
Fast forward a few years, after getting paid $1.50/share in dividends and making a small amount in Garmin options, I exited the stock at around $33.50. I bit the bullet and took a loss, because I looked at my other holdings and realized that my money was doing not much work in Garmin and the potential for growth was smaller than the others (i.e. True Religion, Google, etc.). All in all, I lost a couple of bucks per share, but the higher costs was really the opportunity cost.
Garmin's Brief History and Current State
Let's look at how Garmin is doing these days. If you flip through the Rule #1 analysis below, you can see that there's some missing data in MSN Money, but the data that do exist are telling. Every was rosy until about 3 years ago. This was when the financial crisis hit and the smartphones started to take off.
Since many people had bought a car GPS by then, the market was beginning to saturate. Overall growth in the company became stagnant. It also flopped on its venture into the smartphone space. In my opinion, it failed not because it did not have a good strategy, but because of poor design choices. The strategy of using Android as the platform was sound; HTC has become a major force in the smartphone world by adopting the Android OS, so it could be have been done. The failure stemmed from the lackluster hardware specifications that the Garmin phones had. Garmin's phone specs could not match those of the likes of Motorola Droid and HTC/Google Nexus One.
Figure 1: Rule #1 Analysis of Garmin (GRMN)
However, there is light at the end of the tunnel for Garmin. As its automotive segment begins to wind down, its outdoor/fitness, aviation, and marine segments are still doing quite well and with great margins. These segments combined already bring in more net income than the automotive segment. Garmin will soon find its groove again if it can successfully fend off newcomers such as Nike in the outdoor/fitness segment.
The rise of China and India also presents some much needed lifeblood for the automotive segment. So, it is not entirely dead yet. Garmin pays a nice 5-6% dividend, has a steady cash flow, and its balance sheet is strong. It's current P/E ratio is 11.2, which is not expensive at all. Investors have priced it as a steady, if not declining stock. If the stock falls below $30, it could be start to be a bargain again.
Conclusion
So, was Garmin a mistake? Yes and no. The mistake was exhausting my cash a little too quickly, but who would have known how low it could go back in 2008/09. If I had only started buying a little later, I would have made some good money. The company is not exactly a Rule #1 stock now, since it is well past its growth phase, but it could still be a value stock. The main reason I wanted out was because I saw better opportunities out there. Taking that loss was difficult, but it's for the better.
Friday, April 15, 2011
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.
Monday, April 11, 2011
USCCB Socially Responsible Investment Guidelines - Part 5: Pursuing Economic Justice
The fourth area covered by the investment policies of the USCCB is "Pursuing Economic Justice".
Economic injustices are plentiful in the business world where increasing profits is sometimes the only goal for companies. With public companies, management is often evaluated based on the earnings per share metric. If a company makes a lot of money, the share price would naturally be higher. Therefore, the incentives for management would often be just to maximize the profits. That is not to say that all companies increase their profits and neglect any moral duty. However, many a times, companies have to make an extra effort in ensuring that their operations promote economic justice.
The 2 sub-categories under this area are:
- Labour Standards/Sweatshops
- Affordable Housing/Banking
Labour Standards/Sweatshops
The use of sweatshops are especially prevalent in clothing manufacturers' operations in developing countries. Sweatshops typically have harsh and dangerous working conditions. Some force workers to work long hours with very poor wages. Some exploit child labour. Laborrights.org is an active voice on this issue and lists a number of companies that allegedly operate sweatshops. They include Walmart (Ticker: WMT), Kohls (Ticker: KSS), and Abercrombie & Fitch (Ticker: ANF).
When I became interested in True Religion (Ticker: TRLG), one of the first things I wanted to find out was whether they operated any sweatshops. It turns out that they do not manufacture their own products, but hire contract manufacturers in the United States to make their jeans and clothing. So, I breathed a sigh of relief, knowing that labour regulations in the US are strictly enforced and as a result, no "sweat" would be involved in the making of their products.
There is, however, the other side to this argument. Some argue that while it is true that conditions are harsh in these supposed "sweatshops", the working conditions of other work in those developing countries are often even worse. For example, one could choose to work at a Nike factory for 12 hours a day or work on a farm under the burning sun for 14 hours. Of course, the local farms don't nearly get as much attention as the Nike factory does. Some also claim workers wished Nike would expand even more in their area so that their relatives would also get to work at Nike.
In the end, it all comes down to your own evaluation of the situation. I always think that "where there's smoke, there's fire". You will not get a real idea of the working conditions of a factory unless you're really there to investigate. I would say it's best to avoid companies which have a long history of complaints (e.g. Walmart and Nike).
Aside from investing in these companies, perhaps it's also not a bad idea to boycott these companies yourself to send them a message that you don't agree with their business practices.
When I became interested in True Religion (Ticker: TRLG), one of the first things I wanted to find out was whether they operated any sweatshops. It turns out that they do not manufacture their own products, but hire contract manufacturers in the United States to make their jeans and clothing. So, I breathed a sigh of relief, knowing that labour regulations in the US are strictly enforced and as a result, no "sweat" would be involved in the making of their products.
There is, however, the other side to this argument. Some argue that while it is true that conditions are harsh in these supposed "sweatshops", the working conditions of other work in those developing countries are often even worse. For example, one could choose to work at a Nike factory for 12 hours a day or work on a farm under the burning sun for 14 hours. Of course, the local farms don't nearly get as much attention as the Nike factory does. Some also claim workers wished Nike would expand even more in their area so that their relatives would also get to work at Nike.
In the end, it all comes down to your own evaluation of the situation. I always think that "where there's smoke, there's fire". You will not get a real idea of the working conditions of a factory unless you're really there to investigate. I would say it's best to avoid companies which have a long history of complaints (e.g. Walmart and Nike).
Aside from investing in these companies, perhaps it's also not a bad idea to boycott these companies yourself to send them a message that you don't agree with their business practices.
Affordable Housing/Banking
This category applies mainly in the US. In the past (and even presently in a few cases), financial institutions engaged in a practice called "redlining". This term was coined from the banks drawing lines on a map to highlight communities where they would use discriminatory lending practices. The banks would either refuse to lend to certain people from an area or increase the borrowing costs for them. Typically, the discriminated areas would be areas with a high concentration of non-white population.
This practice is essentially racial discrimination. The Community Reinvestment Act was passed in 1977 to discourage this type of behaviour. One interesting fact: apparently, President Obama, as a lawyer in 1994, represented a man who sued Citibank (Ticker: C) for redlining. Some have attributed the curbing of redlining to the subprime mortgage financial crisis in 2008. I don't believe that is the case. The Act's intent was to help discriminated communities get fair treatment from the banks. Nowhere in the Act did it tell the banks to lend money to borrowers who could not pay the loans they borrowed to buy seven houses that cost way more than what they would make in an entire lifetime.
This practice is essentially racial discrimination. The Community Reinvestment Act was passed in 1977 to discourage this type of behaviour. One interesting fact: apparently, President Obama, as a lawyer in 1994, represented a man who sued Citibank (Ticker: C) for redlining. Some have attributed the curbing of redlining to the subprime mortgage financial crisis in 2008. I don't believe that is the case. The Act's intent was to help discriminated communities get fair treatment from the banks. Nowhere in the Act did it tell the banks to lend money to borrowers who could not pay the loans they borrowed to buy seven houses that cost way more than what they would make in an entire lifetime.
Conclusion
The category of Economic Justice is an extension of the Human Rights category. Every human person should be treated with dignity and not be discriminated based on their gender, race, etc. Even with some cursory research, you should be able to dig up some dirt. Good luck!
Saturday, April 2, 2011
Opportunity with Nokia (NOK)
As you may have heard, Nokia (Ticker: NOK) is teaming up with Microsoft to deliver phones running Windows Phone 7 OS. Since that announcement, the stock has been punished and is sitting at around $8.50 these days. The future for Nokia looks very uncertain, and I believe as a result of this, there is quite an anomaly with one of its call options.
As you know, the farther out an option expires, the more expensive it is. It's logical...because if you have a later expiry date, the chances are greater that your position will make money. However, what I found with Nokia's call options with a strike price of $5.00 was essentially the opposite. As you can see in the table below, options that are set to expire in July of 2011 have a higher asking price than ones set to expire in January 2013! The bid prices, however, are as you would expect (i.e. more expensive as your get farther away). In any case, what’s happening is that the time value of the options is pretty near to zero! The strike price is $5.00 + cost of option of $3.55 = $8.55, which is just $0.05 higher than the current share price. I have never seen an option so far out being sold so cheaply. If I were to buy the Jan 2013 option now, as long as the stock moves up above $8.50 sometime between now and January 2013, I can make some money. This is very, very curious!
Table 1: NOK Call Options with $5.00 Strike Price
As you know, the farther out an option expires, the more expensive it is. It's logical...because if you have a later expiry date, the chances are greater that your position will make money. However, what I found with Nokia's call options with a strike price of $5.00 was essentially the opposite. As you can see in the table below, options that are set to expire in July of 2011 have a higher asking price than ones set to expire in January 2013! The bid prices, however, are as you would expect (i.e. more expensive as your get farther away). In any case, what’s happening is that the time value of the options is pretty near to zero! The strike price is $5.00 + cost of option of $3.55 = $8.55, which is just $0.05 higher than the current share price. I have never seen an option so far out being sold so cheaply. If I were to buy the Jan 2013 option now, as long as the stock moves up above $8.50 sometime between now and January 2013, I can make some money. This is very, very curious!
Table 1: NOK Call Options with $5.00 Strike Price
| Call Options | Strike Price at 5.00 |
|
0.10
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