Okay I missed the news when everyone else was talking about it, but better late than never right?!
Google reported earnings after hours on Thursday missing estimates and raising concerns of slowing growth. Their stock responded with a swift drop despite 52% growth since last year. This appears to be a really short-sighted reaction since they recently changed the way AdSense accepts clicks. AdSense revenues make up a majority of the company’s income and by reducing the click area of the ads they have temporarily reduced earnings since they receive less clicks. However, it looks like everyone is failing to realize that they made a strong long-term business decision that will increase the value of their advertising (since clicks will now be of higher quality and less accidental) in the coming years (quarters?). I find their current $120 billion valuation really attractive, I definitely anticipate them trouncing the market in the near future as they continue to surprise everyone with future earnings.
If that news wasn’t enough to shake up the tech sector, Microsoft announced their plan to buy Yahoo! for $44 billion less than a day later. This deal is a clear response to Google’s growing threat to their online presence and Microsoft sounds really hungry for Yahoo!. Not only is their bid 60% higher than Yahoo!’s previous valuation, but they sound comfortable increasing that bid if they have to! Still, Google investors seem to be unaffected by the news as GOOG shares were about the same as they were right after the earnings report.
In related news, I have an interview for a software engineering internship with Google in a couple weeks; I think that will add an easy $10 to their share price if I get it :)
This recent rally is no excuse to accept satisfaction with my holdings so I am continuing my portfolio review from part 1: Recession Review.
Continued in alphabetical order:
Exponent (EXPO)
-This consulting firm has had solid growth for many years and continues to be a leader in a new and expanding market. They have a team of very talented professionals that in turn helps attract more very talented professionals which in the past has consistently provided earnings growth crushing analyst expectations. Its low $400m market cap attracts little attention from wall street and I think is a large reason why it has not been priced up to a more accurate valuation around $6-700m.
Bottom line: This type of consulting firm has a very small place in the market right now and there is a lot of ‘wait-and-see’ type thought out there, but the information we do have suggests impressive growth and I think a $1.5b footprint is very reasonable in five years.
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For those of you living under a rock, the market as a whole dropped throughout the day down about 3% at its lowest, then ended by shooting up 5% to a 2% gain for the day. CNBC (and I suspect the other news outlets) is having a field day on the good news, with Cramer even calling a bottom! What the swing meant for me, however, was a lot more valuable than any market bottom.
I checked the market indexes when they were down 3% at around 1PM EST before leaving for a couple classes. My thoughts were about the same as they had been for the past few weeks as I critically went over my holdings, constantly debating selling some to cut losses and pick up better companies. This critical attitude makes perfect sense of course, I always want to keep tabs on what I own and make sure it’s all up to snuff. The key being ‘always’.
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I wrote a bit about the recession situation and what it means to investors in Investing in Recessions, now I want to scrutinize all my holdings to see exactly where I stand in all of this! The only thing that matters is that my companies are priced significantly less than they are worth, that provides me with all the safety I need in any market condition. Because of that, I will focus my attention on what I think they are worth and what I think they will be worth in five years.
In Alphabetical Order:
Activision Blizzard, Inc (ATVI)
- Technically it is still Activision, Inc. but I see no reason for the merger not to go through and my shares will be converted 1:1 so it’s close enough to the same thing. On the Activision side we have consistent 25%+ annualized returns for the past 10 years and an almost legendary brand name that has proven it has exceptional staying power with decades of hits. On the Blizzard half we have annualized returns of over 60% for the past 14 years (best number I can find, I would guess 50% over the last 10) and a team of management and developers that can hardly produce anything except a number one seller. While every other game company is spending truckloads of cash throwing out title after title trying to land one hit in twenty and maybe even making a little profit, Blizzard produces a game once every couple of years and earns profits about equal to every other major player combined (that’s being generous, they probably make twice that). They still make up a very small portion of the entertainment industry and if recession fears really set in they could benefit greatly by providing some of the most affordable entertainment there is.
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Recession. Recession. Recession. That seems to be the buzzword in the media right now, maybe it will work for me too! It seems everyone wants to reposition their investments to protect their portfolio in a recession, and who can blame them? Most economists agree we are either entering a recession or already in one and it makes sense that our investments should reflect the changing conditions. The only problem with everyone looking for recession proof investments, however, is that everyone is looking for recession proof investments!
A recession proof investment in the stock market means a company that is not tied to the current economic problems ravaging the rest of the stock market. For the current conditions, there are a few properties to look for: (1) A company that does not need external financing to continue business [a lot of tech], (2) companies with products that will sell well regardless of economic growth like household necessities [Proctor and Gamble, Wal-Mart, etc], (3) balance sheets with strong cash reserves and secure accounts receivable [clients unrelated to mortgages or other credit], and perhaps (4) companies that can can capitalize on the downfall of vulnerable businesses [bankruptcy firms].
Berkshire Hathaway is an excellent example with it’s large cash reserves, strong diversification, and thriving insurance business. Additionally, with Warren Buffet at the helm, investors can be confident that their money is in good hands no matter what the economy is doing. The recent performance of Berkshire’s share price provides an amusing confirmation that everyone else seems to think the same way. During the first half of the year while the market was providing consistent growth, investors stuck with hot companies and enjoyed their above average returns. As a result, Berkshire got little attention and its price stayed flat. The second half of the year went a bit differently as housing and credit concerns introduced volatility and reduced performance. During that time, investors quickly dumped their previous holdings in fear and fled for security in Berkshire and its companies, resulting in rapid price appreciation for Berkshire shares. This graph shows the almost inverse relationship between the volatility of the S&P 500 and Berkshire shares, I chuckle a bit every time I see it.
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Analysts always have three recommendations: Buy, Hold, or Sell. I understand buying, I understand selling, I cannot fathom a middle ground. A stock is either great or it’s not, that’s it. If a stock is merely good, sell it and buy one that’s great.
The only reason to hold a stock is the only reason to buy it: It’s trading for less than it’s worth. If it’s not trading for less than it’s worth, get rid of it and find one that is. I read recommendations all the time for a middle ground, where it’s not quite a buy and it’s not quite a sell. That’s absurd. I don’t want mediocre, I want amazing. Anything less is a crystal clear sell.
To be fair, I have found two reasons to hold rather than sell, but they have nothing to do with how well the stock is priced. In taxable accounts, it is sometimes reasonable to hold onto a less-than-amazing stock for tax advantages. It may be helpful to carry the capital gain or loss into the next tax year where it will have a more favorable impact on your taxes. The other reason is to increase your holding period into the ‘long-term’ tax holding period which reduces the capital gains tax based on how long you have held a position. However, at times when there is no tax advantage, or they are in a tax-free retirement account, ‘Hold’ is synonymous with ‘Sell’.
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Should you be? There are real reasons to fear much further drops in this market laden with credit fears. A lot of companies are going to drop earnings far beyond the wildest analyst expectations and these housing troubles could last for years. Those companies certainly have plenty of reason to be selling far below what they were just three months ago, but what about the others? Almost every public company is feeling the pain in stock prices, but is it really rational?
Fear is rarely rational and I don’t think it is any different now. I’m not calling a bottom by any means, but I am calling cheap. There are more bargains now than there have been for a long while, don’t let them hide behind the red.
Then when you find them, let me know!
