I purchased shares of HD at $109.5 yesterday (4/29/15). The purchase was made after a 7%+ pull back from its 52-week high and brings my total position to 2/3 of my target allocation. No significant developments have occurred that change my thesis for owning HD, and the decline is not unwarranted based on valuation of HD relative to the S&P.
Going forward, I will look to make another purchase after an approximate 10% pullback from $109.5 (~$98.5) to increase the position to my full target allocation.
Thursday, April 30, 2015
The Home Depot (HD)
The Home Depot (HD) is a retail company that sells appliances, outdoor supplies, building materials, and other products used in home construction and re-modeling. HD's main competitor is Lowe's.
HD is a solidly managed company that is harnessing the omni-channel model, which integrates physical stores with digital purchasing. I have used the omni-channel to buy specific small items that were not available in the store and have been very pleased with the process. It was easy to purchase, easy to pick up, and there were no extra charges for this convenience. YAH!!
HD's management is focused on improving the retail experience for consumers. In addition, HD has a history of rewarding its employees for their mutual success. The following is a quote from HD's most recent earnings call:
What to watch for: New and existing home sales data, according to analysts, and U.S. GDP, according to HD management. Increases in home sales theoretically generate increased activity at HD retail stores due to the need to modify, repair, and re-model homes. Watching these data points is not as important as keeping track of HD management's long-term execution, in my opinion. As long as they are executing and enhancing the retail experience for consumers, HD will do well.
Common Cents Take: HD is a great company that takes care of its employees and customers. The focus on these two aspects of running a business will allow HD to grow its earnings, assuming that HD is constantly improving on the two.
HD is a solidly managed company that is harnessing the omni-channel model, which integrates physical stores with digital purchasing. I have used the omni-channel to buy specific small items that were not available in the store and have been very pleased with the process. It was easy to purchase, easy to pick up, and there were no extra charges for this convenience. YAH!!
HD's management is focused on improving the retail experience for consumers. In addition, HD has a history of rewarding its employees for their mutual success. The following is a quote from HD's most recent earnings call:
I want to close by thanking our associates for their hard work and dedication to our customers in the fourth quarter and throughout the year. For the second half of the year, 100% of our stores qualify for success sharing, our profit sharing program for our hourly associates. This is our largest second half payout to date. We look forward to continuing this momentum in 2015.I see HD as a company that takes care of its employees, so the employees will take care of the customers, so the customers will take care of the company, so the company will take care of its employees...
What to watch for: New and existing home sales data, according to analysts, and U.S. GDP, according to HD management. Increases in home sales theoretically generate increased activity at HD retail stores due to the need to modify, repair, and re-model homes. Watching these data points is not as important as keeping track of HD management's long-term execution, in my opinion. As long as they are executing and enhancing the retail experience for consumers, HD will do well.
Common Cents Take: HD is a great company that takes care of its employees and customers. The focus on these two aspects of running a business will allow HD to grow its earnings, assuming that HD is constantly improving on the two.
Wednesday, April 29, 2015
RH Purchase @ "$91"
I purchased RH today as it declined below $90. However, I did not purchase the standard share of stock. I purchased a call option, which is basically the right to buy 100 shares of the stock at a certain price. This is the first option I have purchased for the Common Cents Portfolio, and I am using it as a learning tool for potential future purchases.
I purchased a June 19 call option with an $80 strike price for $11.00. That's a mouthful. What this means is that I purchased the right to buy 100 shares of RH stock at $80, and I paid $11 per option/share, or $1100 total ($11/share x 100 shares = $1100). I have to exercise (buy 100 shares at $80 a piece) or sell this option on or before June 19, or it will expire, and I will lose all of my $1100. I will go into this more in a 101 post later. But for now, I'll explain the purpose of options as the ability to control more shares of stock, and thus more potential for capital gains, with less money. The downside is that its a timed bet.
My goal is to sell the options for more than $11. To do this, RH will likely have to move above $91, which is equal to my strike price of $80 plus the $11 I paid per option/share. Every dollar above $91 that RH's share prices increases to will equate to roughly $100 of incremental gain. I purchased the June 19 option, because RH reports its earnings shortly before that date and usually spikes on a good earnings report. We'll see how this timed bet works.
My traditional strategy for this trade would be to purchase RH stock below $90 and sell that chunk when it increases 7% - 10%.
I purchased a June 19 call option with an $80 strike price for $11.00. That's a mouthful. What this means is that I purchased the right to buy 100 shares of RH stock at $80, and I paid $11 per option/share, or $1100 total ($11/share x 100 shares = $1100). I have to exercise (buy 100 shares at $80 a piece) or sell this option on or before June 19, or it will expire, and I will lose all of my $1100. I will go into this more in a 101 post later. But for now, I'll explain the purpose of options as the ability to control more shares of stock, and thus more potential for capital gains, with less money. The downside is that its a timed bet.
My goal is to sell the options for more than $11. To do this, RH will likely have to move above $91, which is equal to my strike price of $80 plus the $11 I paid per option/share. Every dollar above $91 that RH's share prices increases to will equate to roughly $100 of incremental gain. I purchased the June 19 option, because RH reports its earnings shortly before that date and usually spikes on a good earnings report. We'll see how this timed bet works.
My traditional strategy for this trade would be to purchase RH stock below $90 and sell that chunk when it increases 7% - 10%.
American Capital Agency Corporation (AGNC)
American Capital Agency Corporation (AGNC) procures short-term loans, which generally have low interest rates, and buys long-term loans, which generally have high interest rates. AGNC pursues profits based on the difference between these two rates. Having said that, the complexity of AGNC's investment instruments are beyond my comprehension.
Most investors who owns AGNC do so for the dividend, which is typically in excess of 10%. However, this dividend fluctuates based on how well AGNC's portfolio performs. When AGNC must decrease its dividend, as it had to in 2013, the share price suffers dramatically. Besides the dividend, another important metric to consider is the net asset value (NAV). Simply put, NAV represents AGNC's total assets, minus its total liabilities, divided by the total number of shares. Typically, AGNC's NAV should be similar to its share price. In recent years, however, AGNC's share price has been trading at discounts of up to 20% below its NAV.
One of the knocks against AGNC is that its earnings, and thus dividends, are hard to predict. To increase its transparency, AGNC has recently begun paying monthly dividends and reporting NAV monthly, rather than quarterly. This effort seems to have decreased AGNC's volatility, for now anyway.
What to watch for: US bond yields. The bond yields are indicative of yields on mortgages, which is the primary investment instrument of AGNC. Specifically, the difference between the shorter term and longer term bond yields dictate how much money AGNC can make. An additional consideration that is overly prevalent on investors' minds here lately (first half of 2015) whether or not "The Fed" will raise short-term rates this year. Doing so would immediately increase AGNC's short-term borrowing costs, while not necessary increasing the yield on long-term mortgages.
Common Cents Take: Credit default swaps, options, swaption, dollar roll income - I just don't have the time to understand all of these investment instruments used by AGNC. Not to mention, these terms came up a lot in the housing market crash in 2007/2008. I understand the dividend and the NAV that is reported monthly; however, there is no reason to put blind faith in these metrics. This position will likely find its way out of the Common Cents Portfolio.
Most investors who owns AGNC do so for the dividend, which is typically in excess of 10%. However, this dividend fluctuates based on how well AGNC's portfolio performs. When AGNC must decrease its dividend, as it had to in 2013, the share price suffers dramatically. Besides the dividend, another important metric to consider is the net asset value (NAV). Simply put, NAV represents AGNC's total assets, minus its total liabilities, divided by the total number of shares. Typically, AGNC's NAV should be similar to its share price. In recent years, however, AGNC's share price has been trading at discounts of up to 20% below its NAV.
One of the knocks against AGNC is that its earnings, and thus dividends, are hard to predict. To increase its transparency, AGNC has recently begun paying monthly dividends and reporting NAV monthly, rather than quarterly. This effort seems to have decreased AGNC's volatility, for now anyway.
What to watch for: US bond yields. The bond yields are indicative of yields on mortgages, which is the primary investment instrument of AGNC. Specifically, the difference between the shorter term and longer term bond yields dictate how much money AGNC can make. An additional consideration that is overly prevalent on investors' minds here lately (first half of 2015) whether or not "The Fed" will raise short-term rates this year. Doing so would immediately increase AGNC's short-term borrowing costs, while not necessary increasing the yield on long-term mortgages.
Common Cents Take: Credit default swaps, options, swaption, dollar roll income - I just don't have the time to understand all of these investment instruments used by AGNC. Not to mention, these terms came up a lot in the housing market crash in 2007/2008. I understand the dividend and the NAV that is reported monthly; however, there is no reason to put blind faith in these metrics. This position will likely find its way out of the Common Cents Portfolio.
Sunday, April 26, 2015
Apple (AAPL)
Apple (AAPL), in case you live in a cave, under a rock, or in a hot air balloon, designs and sells electronic products and associated services to consumers and businesses. Apples flagship product is the iPhone, jointly followed by the iPad, iMac, iThis, and iThat.
To put my rationale for investing in AAPL simply, AAPL solves problems. Not only that, their solutions are elegant, simple, and highly effective. Apple provided a solution to my need for mobile music, then to my desire to carry one item that functions as a phone and mobile music player, then to my desire to not carry a clunky laptop around (not really I don't own an iPad), and they have many more solutions in the pipeline. Recently, AAPL created a method for me to pay with my phone rather than grabbing my wallet out of my back pocket (i.e., Apple Pay). Soon, there will be a solution to me having to pull my phone out to accomplish this task.
Like I said, solutions. AAPL seeks to learn how I perform daily tasks and in what ways those tasks can be performed in a more efficient and sensical way. The truly remarkable aspect of AAPL's designs is the ease of use. How many 2-year-olds do you know that can operate an iPad? When my then 85ish grandmother got her first iPad, she learned how to use it in a matter of days (if not hours) and now has very little use for her desktop or laptop. Not to mention that the iPad most likely led to her purchase of an iPhone as well.
The knock on AAPL is that the company is so large and so successful that it seems impossible to sustain a meaningful sales/earnings growth rate. This issue has been deemed "the law of large numbers." I agree that this issue should be on investors' minds, but I by no means feel that the daily tasks I perform cannot be improved upon. I don't think I should ever have to pull keys out of my pocket to open my front door or start my car. I should have a watch to serve that function. Speaking of the watch, if the new Apple watch gets even one approved health monitoring function, such as continuous monitoring of blood sugar for diabetes patients, move over iPhone-Apple has a new flagship product.
Oh, and by the way, should the law of large numbers be the correct thesis, AAPL has a huge amount of cash on its balance sheet. Transitioning from a growth company to a steady cash cow seems like the worst case scenario, and that doesn't seem too horrible to me.
What to watch for: New products. AAPL's news is emotional. The company is polarizing. But only one issue matters, AAPL's solutions. Everything else is a distraction.
Common Cents Take: AAPL has the potential to drastically change our lives with its solutions. It's a game changer. And then again, maybe its not. In that case, I'll take a steady cash flow from the company with one of the best balance sheets of any publicly traded company. Win-win.
To put my rationale for investing in AAPL simply, AAPL solves problems. Not only that, their solutions are elegant, simple, and highly effective. Apple provided a solution to my need for mobile music, then to my desire to carry one item that functions as a phone and mobile music player, then to my desire to not carry a clunky laptop around (not really I don't own an iPad), and they have many more solutions in the pipeline. Recently, AAPL created a method for me to pay with my phone rather than grabbing my wallet out of my back pocket (i.e., Apple Pay). Soon, there will be a solution to me having to pull my phone out to accomplish this task.
Like I said, solutions. AAPL seeks to learn how I perform daily tasks and in what ways those tasks can be performed in a more efficient and sensical way. The truly remarkable aspect of AAPL's designs is the ease of use. How many 2-year-olds do you know that can operate an iPad? When my then 85ish grandmother got her first iPad, she learned how to use it in a matter of days (if not hours) and now has very little use for her desktop or laptop. Not to mention that the iPad most likely led to her purchase of an iPhone as well.
The knock on AAPL is that the company is so large and so successful that it seems impossible to sustain a meaningful sales/earnings growth rate. This issue has been deemed "the law of large numbers." I agree that this issue should be on investors' minds, but I by no means feel that the daily tasks I perform cannot be improved upon. I don't think I should ever have to pull keys out of my pocket to open my front door or start my car. I should have a watch to serve that function. Speaking of the watch, if the new Apple watch gets even one approved health monitoring function, such as continuous monitoring of blood sugar for diabetes patients, move over iPhone-Apple has a new flagship product.
Oh, and by the way, should the law of large numbers be the correct thesis, AAPL has a huge amount of cash on its balance sheet. Transitioning from a growth company to a steady cash cow seems like the worst case scenario, and that doesn't seem too horrible to me.
What to watch for: New products. AAPL's news is emotional. The company is polarizing. But only one issue matters, AAPL's solutions. Everything else is a distraction.
Common Cents Take: AAPL has the potential to drastically change our lives with its solutions. It's a game changer. And then again, maybe its not. In that case, I'll take a steady cash flow from the company with one of the best balance sheets of any publicly traded company. Win-win.
Friday, April 24, 2015
Q1 Earnings Season
The first quarter earnings season is upon is. Earnings season is a general term for the time period when the majority of companies report their earnings over the prior 3-month period. It has no set bounds as far as duration; however, it is commonly accepted that Alcoa (AA) kick-starts the season as the first major earnings release.
This period is important for several reasons. We as investors get a snapshot of how companies performed previously and how they expect to perform in the future. We get clarification on the companies' business plans, and how well they are executing on these plans. Major moves in the prices of specific stocks and the market as a whole can be expected due to these reports.
Research analysts use the earnings conference calls to update their estimates for future earnings and growth of specific companies. The analysts then review their specific recommendations on the companies they cover. The recommendations include the analysts' ratings (e.g., buy, sell, hold, etc.) and 1-yr price targets for the stocks. These revised estimates/opinions can cause a stock to jump up or down in price over a relatively short period of time.
It is important not to react hastily during this period. Quick decisions are often incorrect. After reading the earnings conference call transcripts or listening to the earnings webcasts, I often can pick up additional shares of stock for the Common Cents portfolio when the published headlines (EPS, Revenues), which don't factor in the overall story, cause a stock price to plummet unreasonably.
Common Cents Take: Be prepared to digest transcripts quickly during earnings season, especially when drastic moves in the prices of individual stocks occur. Informed buying or selling when these drastic moves occur can increase overall portfolio performance. However, uninformed buying and selling is usually unsuccessful.. A calm temperament and delayed action are just as beneficial as taking advantage of fast price swings in stocks.
This period is important for several reasons. We as investors get a snapshot of how companies performed previously and how they expect to perform in the future. We get clarification on the companies' business plans, and how well they are executing on these plans. Major moves in the prices of specific stocks and the market as a whole can be expected due to these reports.
Research analysts use the earnings conference calls to update their estimates for future earnings and growth of specific companies. The analysts then review their specific recommendations on the companies they cover. The recommendations include the analysts' ratings (e.g., buy, sell, hold, etc.) and 1-yr price targets for the stocks. These revised estimates/opinions can cause a stock to jump up or down in price over a relatively short period of time.
It is important not to react hastily during this period. Quick decisions are often incorrect. After reading the earnings conference call transcripts or listening to the earnings webcasts, I often can pick up additional shares of stock for the Common Cents portfolio when the published headlines (EPS, Revenues), which don't factor in the overall story, cause a stock price to plummet unreasonably.
Common Cents Take: Be prepared to digest transcripts quickly during earnings season, especially when drastic moves in the prices of individual stocks occur. Informed buying or selling when these drastic moves occur can increase overall portfolio performance. However, uninformed buying and selling is usually unsuccessful.. A calm temperament and delayed action are just as beneficial as taking advantage of fast price swings in stocks.
Thursday, April 23, 2015
Southwest Airlines (LUV)
Southwest Airlines (LUV) is one of the lowest cost airlines out of the majors. LUV has also been one of the most consistent airlines in terms of profitability, logging in 42 consecutive years of recording a profit. So what, right? Well, the airline industry has been an ugly duckling for quite some time, with multiple airlines recording negative profits and/or declaring bankruptcy in recent history.
So why take on a position in this ugly duckling industry? Consolidation of airlines has decreased competition and allowed ticket prices to increase. New fuel efficient planes have increased the profitability per flight. Blah, blah, blah...
I'm invested in LUV because I believe in the company, its business model, and how it treats its employees. Flying Southwest is an enjoyable experience. I can't say the same for any other airline I've flown. Southwest employees are generally friendly and charismatic. Boarding the plane is simple, and the "bags fly free" policy is very convenient. Oh, and the cancellation policy. Muah! Cancelling a flight on most other airlines costs you about as much as it would to abandon your ticket and purchase a new one. Give me a break. Southwest is just all around pleasant.
In every earnings conference call, LUV gives a shout out to its employees. Here is an excerpt taken from the most recent earnings conference call:
In the past, the knock on LUV is that many of its flights from Dallas were not non-stop. Nobody likes layovers - that's a simple fact. However, this limitation has recently expired, and LUV will now reap the benefits. Non-stop flights will increase the attractiveness of LUV to business travelers, as has the business select ticketing option and the great rapid rewards program. LUV is perfect for business travel. And, when I'm not flying for business, I just prefer to see the smiling faces of LUV's employees.
What to watch for: Oil prices and ticket prices (competition). Jet fuel makes up the majority of the airlines' costs. When oil prices go up, airline stocks go down. It is a simple fact that will likely never change. Ticket prices can be tracked through the various metrics the airlines use, such as PRASM (Passenger revenue pre available seat mile), etc. These are not the most straight-forward metrics, but when they decrease significantly, the airline stocks will decrease.
Common Cents Take: LUV is a great company with a great business model. However, investing in airlines stocks has historically been tough due to fuel prices and competition. LUV is likely not a long-term, buy and forget stock, but it will likely outperform the other airlines stocks.
So why take on a position in this ugly duckling industry? Consolidation of airlines has decreased competition and allowed ticket prices to increase. New fuel efficient planes have increased the profitability per flight. Blah, blah, blah...
I'm invested in LUV because I believe in the company, its business model, and how it treats its employees. Flying Southwest is an enjoyable experience. I can't say the same for any other airline I've flown. Southwest employees are generally friendly and charismatic. Boarding the plane is simple, and the "bags fly free" policy is very convenient. Oh, and the cancellation policy. Muah! Cancelling a flight on most other airlines costs you about as much as it would to abandon your ticket and purchase a new one. Give me a break. Southwest is just all around pleasant.
In every earnings conference call, LUV gives a shout out to its employees. Here is an excerpt taken from the most recent earnings conference call:
Our 2014 profits earned our employees a well-deserved record $355 million in profit sharing and I just want to congratulate all of our wonderful employees on just the fabulous results which also represents our 42nd consecutive year of profit.I have to believe, based on the conference calls and observing the employees in action, that the Southwest team, from top to bottom, wants the company to succeed. Ahh, refreshing.
In the past, the knock on LUV is that many of its flights from Dallas were not non-stop. Nobody likes layovers - that's a simple fact. However, this limitation has recently expired, and LUV will now reap the benefits. Non-stop flights will increase the attractiveness of LUV to business travelers, as has the business select ticketing option and the great rapid rewards program. LUV is perfect for business travel. And, when I'm not flying for business, I just prefer to see the smiling faces of LUV's employees.
What to watch for: Oil prices and ticket prices (competition). Jet fuel makes up the majority of the airlines' costs. When oil prices go up, airline stocks go down. It is a simple fact that will likely never change. Ticket prices can be tracked through the various metrics the airlines use, such as PRASM (Passenger revenue pre available seat mile), etc. These are not the most straight-forward metrics, but when they decrease significantly, the airline stocks will decrease.
Common Cents Take: LUV is a great company with a great business model. However, investing in airlines stocks has historically been tough due to fuel prices and competition. LUV is likely not a long-term, buy and forget stock, but it will likely outperform the other airlines stocks.
Monday, April 20, 2015
Visa (V)
Visa (V) is a transactions processing company - it sounds complicated, but it's really pretty basic to understand. V takes a percentage of every transaction that it processes over its network. So, you go to the store to buy a pack of smokes (hopefully not) and swipe with your Visa card, and V takes a cut. Its main competitor is MasterCard (MA), followed by American Express and Discovery.
V and MA generally trade pretty equally. V is the more established player, and MA has the higher growth potential. Both are, in my opinion, a play on the transition from primarily cash-based to card-based societies overseas (assuming you are reading this in the US). Nobody, assuming everybody is exactly like me, wants to procure cash, carry it around, count it out when paying, and keep loose change. Pain. In. The. Rump. There are specific purposes where cash is appropriate, but 90% of one's daily transactions are just better without cash.
V has several avenues of growth that it is pursuing, most of which intend to increase the user experience for digital purchases (i.e., internet purchases). Of course! I hate when I have to walk across the room to get my wallet every time I want to make a purchase on Amazon!
V is a steady grower, and very few macro- or micro-economic events tend to influence volatility in this equity. As such, V maintains generally higher PE and PEG ratios. Rightfully so, it is pretty close to a "sleep at night" growth position.
Common Cents Take: V has great long-term growth prospects and is a low volatility name. This is one of the easiest positions to own in the Common Cents portfolio. However, its low volatility limits the opportunities to increase portfolio returns through short-term trading.
V and MA generally trade pretty equally. V is the more established player, and MA has the higher growth potential. Both are, in my opinion, a play on the transition from primarily cash-based to card-based societies overseas (assuming you are reading this in the US). Nobody, assuming everybody is exactly like me, wants to procure cash, carry it around, count it out when paying, and keep loose change. Pain. In. The. Rump. There are specific purposes where cash is appropriate, but 90% of one's daily transactions are just better without cash.
V has several avenues of growth that it is pursuing, most of which intend to increase the user experience for digital purchases (i.e., internet purchases). Of course! I hate when I have to walk across the room to get my wallet every time I want to make a purchase on Amazon!
V is a steady grower, and very few macro- or micro-economic events tend to influence volatility in this equity. As such, V maintains generally higher PE and PEG ratios. Rightfully so, it is pretty close to a "sleep at night" growth position.
Common Cents Take: V has great long-term growth prospects and is a low volatility name. This is one of the easiest positions to own in the Common Cents portfolio. However, its low volatility limits the opportunities to increase portfolio returns through short-term trading.
Sunday, April 19, 2015
British Petroleum (BP)
British Petroleum (BP) is likely a familiar name to you if you lived in the U.S. and turned on a television in the Spring/Summer of 2010. More on that later. BP has 3 main business segments:
BP, and the major oil and gas companies in general, has changed its focus from rapid expansion to investing in the highest-margin opportunities. Consequently, BP is in the process of divesting the lower-margin opportunities to free up capital for better use. The freed capital has been used to opportunistically reinvest in high-margin projects, repurchase BP shares, and increase dividends.
What to watch for: Oil prices. Shocked? BP has a renewed commitment to its balance sheet, which should allow BP to profit when oil prices are booming and maintain its dividend when oil prices are a "bust." Low oil prices, assuming the integrity of BP's balance sheet is maintained, offer advantageous opportunities to accumulate BP shares at historically high yields. In addition, the long-term growth prospects of oil companies is typically measured by new oil finds and oil reserves.
Common Cents Take: BP is a higher risk and, consequently, higher yield income play. BP will fluctuate with the price of oil, which will undoubtedly ebb and flow over the long-term. However, BP's commitment to its balance sheet will give investors confidence in accumulating higher yielding shares when oil prices, and thus BP's share price, drop.
Upstream - Oil and gas exploration and drilling
Midstream - Transportation and processing of oil and gas products
Downstream - Distribution of oil and gas products (i.e., gasoline, lubricants, etc.)BP is a dividend play; however, it is not a "sleep at night" dividend play like some of the other higher yielding stocks. BP faces many potential legal expenses/penalties for the Deepwater Horizon oil spill in 2010. For this reason, the share price of BP is deflated, and the yield is typically in excess of 6%. The legal proceedings have continued for a long time, but as they draw closer and closer to conclusion, the threat of penalties from the proceedings is moving to the back of investors' minds. As such, BP may have a chance to appreciate in share price when unknowns pertaining to the penalties become realized.
BP, and the major oil and gas companies in general, has changed its focus from rapid expansion to investing in the highest-margin opportunities. Consequently, BP is in the process of divesting the lower-margin opportunities to free up capital for better use. The freed capital has been used to opportunistically reinvest in high-margin projects, repurchase BP shares, and increase dividends.
What to watch for: Oil prices. Shocked? BP has a renewed commitment to its balance sheet, which should allow BP to profit when oil prices are booming and maintain its dividend when oil prices are a "bust." Low oil prices, assuming the integrity of BP's balance sheet is maintained, offer advantageous opportunities to accumulate BP shares at historically high yields. In addition, the long-term growth prospects of oil companies is typically measured by new oil finds and oil reserves.
Common Cents Take: BP is a higher risk and, consequently, higher yield income play. BP will fluctuate with the price of oil, which will undoubtedly ebb and flow over the long-term. However, BP's commitment to its balance sheet will give investors confidence in accumulating higher yielding shares when oil prices, and thus BP's share price, drop.
Saturday, April 18, 2015
The Tools
Good news for Common Cents and those of you who plan to manage your own portfolio of stocks. All the tools you need are available to you free or at minimal cost. In this blog, I will describe the majority of the tools I use on a daily basis when managing my portfolio. Access to the tools is the easy part. Being able to filter out the nonsense and make emotion-free decisions, that is another issue entirely.
I view portfolio management like a game of Texas Hold'Em. The market is against you, and you must be aware of that to succeed. How do you do this? Easy. You have to know your positions cold. You need to know what your exact investment thesis is for each position and what events can derail that thesis. You have to know whether or not you are holding pocket aces. Would you go all in without checking your cards first in Hold'Em? Don't think so. That is gambling - not investing. Knowing that you are holding pocket aces will allow you to stick to your guns and make profits when the market bluffs you with irrelevant news.
Maybe you aren't holding the pocket aces. That's okay too. Knowing what cards you are looking for to make your hand, and folding when they don't materialize, is also a successful investing strategy.
Okay, okay. I'm off my soapbox. Let's talk about the tools. For free news and research, I check the following sites:
As far as literature, any of the Jim Cramer books are great for developing portfolio management skills. Peter Lynch, a previous fund manager for Fidelity, has a few books as well that are very enlightening. These books may have outdated specifics, but the general knowledge that can be obtained from them is pretty timeless.
Common Cents Take: The tools are free. Developing skills requires a bit of effort. Making money in the stock market is without a doubt obtainable by anybody that has confidence in their common sense.
I view portfolio management like a game of Texas Hold'Em. The market is against you, and you must be aware of that to succeed. How do you do this? Easy. You have to know your positions cold. You need to know what your exact investment thesis is for each position and what events can derail that thesis. You have to know whether or not you are holding pocket aces. Would you go all in without checking your cards first in Hold'Em? Don't think so. That is gambling - not investing. Knowing that you are holding pocket aces will allow you to stick to your guns and make profits when the market bluffs you with irrelevant news.
Maybe you aren't holding the pocket aces. That's okay too. Knowing what cards you are looking for to make your hand, and folding when they don't materialize, is also a successful investing strategy.
Okay, okay. I'm off my soapbox. Let's talk about the tools. For free news and research, I check the following sites:
The Street - I am signed up for the daily newsletters at The Street, so I can keep up with trending topics in investing news. The daily "10 Things You Should Know" article is a staple in my morning routine. I also use The Street to read research articles and breaking news about the stocks that I am interested in.
Yahoo Finance - Yahoo sources news from various other sites. This source is usually hit-or-miss; however, it is good to get multiple perspectives on popular issues, even from questionable sources. I use the worthless message boards on Yahoo Finance for less popular stocks when there is no other new news available. The boards have notified me of news articles and press releases which I would otherwise have not been aware of.
Seeking Alpha - This has been my favorite news/research site as of late. Seeking Alpha users post research articles outlining their investment theses for their positions. In addition, Seeking Alpha is also my go-to for earnings call transcripts. Having access to the earnings call transcripts allows me to read these at my leisure rather than having to devote an hour or more to a webcast online. I also have a Seeking Alpha app on my mobile device. I input the positions in my "portfolio," and when new articles are posted that pertain to these positions, I get a notification on my device. These articles are great quick reads in my down time.
CNBC - It's a news station. They have to publish news. It is what it is. The CNBC app updates me on major earnings reports and economic data as it is released. Although I don't give the data points major consideration, it's nice to at least be aware of them.
CNBC's Mad Money w/ Jim Cramer - Some people love him - some don't. I don't personally know the guy, I just pay attention to what he says. The daily podcasts of mad money are available for download and are great tools for learning about prospective positions, keeping abreast on market news, and honing portfolio management strategies.In addition to these sources, there are endless others available for news and research. In addition to news and research articles, many of the sources have useful data for valuing stocks, such as earnings estimates, growth estimates, PE ratios, PEG ratios, analyst recommendations, etc. etc. etc. and so on. Find the sources that give you the information you need most. It's all free and only requires common sense to parse through.
As far as literature, any of the Jim Cramer books are great for developing portfolio management skills. Peter Lynch, a previous fund manager for Fidelity, has a few books as well that are very enlightening. These books may have outdated specifics, but the general knowledge that can be obtained from them is pretty timeless.
Common Cents Take: The tools are free. Developing skills requires a bit of effort. Making money in the stock market is without a doubt obtainable by anybody that has confidence in their common sense.
Thursday, April 16, 2015
Update on future posts
You'll notice that there have been a few posts recently pertaining to individual stocks. I am going to start the process of explaining the positions currently held in the Common Cents portfolio. In addition, I will periodically be reviewing these positions and updating my investment thesis.
I will also continue with the "101" series of posts. Upcoming 101 topics include free sources of information (i.e. estimates, news, etc.) on stocks and the market in general, initiating research on a prospective position, opening a trading account, executing a trade, and the Common Cents portfolio management methodology.
Some of the concepts in the stock-specific updates may not be covered in the current 101 series posts; however, I intend to include all relevant information necessary to decipher the updates in future posts. I will include links to some definitions that I know have not yet been covered. Feel free to leave any comments or questions on any posts!
I will also continue with the "101" series of posts. Upcoming 101 topics include free sources of information (i.e. estimates, news, etc.) on stocks and the market in general, initiating research on a prospective position, opening a trading account, executing a trade, and the Common Cents portfolio management methodology.
Some of the concepts in the stock-specific updates may not be covered in the current 101 series posts; however, I intend to include all relevant information necessary to decipher the updates in future posts. I will include links to some definitions that I know have not yet been covered. Feel free to leave any comments or questions on any posts!
Wednesday, April 15, 2015
RH: BUY; PT: $115
RH: 4/9/15; $92.41
From Thomson Reuters I/B/E/S Estimates:
S&P EGR: 7.43%
Common Sense Take:
From Thomson Reuters I/B/E/S Estimates:
Forward Earnings: 3.05
Forward PE: 30.3
Earnings Growth Rate (EGR): ~26%
PEG Ratio: 1.16S&P Forward PE: 17.39
S&P EGR: 7.43%
Common Sense Take:
RH has reduced in share price since it neared 100 after its earnings release on 3/26/15. Good thing I trimmed some in the Common Cents portfolio immediately after the spike. Goldman Sachs upgraded the position shortly after the earnings release. Other than that, no relevant news has come out. Therefore, Common Cents maintains a BUY opinion on this position and establishes a price target of $115, assuming a PEG ratio of 1.5 is reasonable given the intact long-term story and the much higher growth rate of RH relative to the S&P (taken from Yahoo Finance).
My price target math is as follows: 1.5 (Assumed PEG) * 26% (EGR) = 39 (Assumed PE); 39 * 3.05 (Forward Earnings) = 118.95. Arbitrarily trim a little of the top, and we're at $115. I include a factor of safety for this position due to its high forward PE - expectations are high for RH's performance.
Going forward, I hope to pick up some RH when it nears $90 and sell that when it nears $100.
AT&T (T)
AT&T (T) provides mobile services, subscription TV, and high-speed Internet
services for businesses and consumers. T is also breaking into the connected car and connected home markets.
T pays out a hefty dividend, traditionally yielding between 5% and 6% annually. Most investors own T because of the consistent dividend payout, which T raises by roughly 2% per year. I am one of those investors. This is a "sleep at night" stock that has very low volatility. However, I see some potential issues with T's business going forward that may make sleeping a little less easy...
First, wireless competition is getting fierce. Verizon is the major competitor, but Sprint and T-Mobile are doing everything they can to steal subscribers from the "Big 2." Second, the cable subscription model is outdated. The consumer today does not want to pay for a bunch of junk. How do I know this? Because I am a consumer today, and I do not want to pay for a bunch of junk. I want ESPN to watch Duke basketball games...and that's about it. If I have to watch a show, which I very rarely do, I want to pay for that show and nothing more. I predict that I will be able to purchase exactly the programs that I want to watch for well under $100 a month in the near future. I would like to see T have a strategy for that competition.
T's position in my portfolio is that of a cash cow. I want to collect T's dividends every quarter without having to worry about wild fluctuations in the stock price. I expect T to underperform the market while the market is hot, but it will act as a buffer if the market turns sour.
What to watch for: Bond rates. This stock serves as a "bond market equivalent." This means that, while bond rates are low, investors will choose T to receive a desirable income. If bond rates rise significantly, some investors will leave T for the safer bonds. This will in turn increase the yield of T, making it more attractive. Catch-22.
Common Cents Take: T is a steady income, low volatility position has its place in my portfolio; however, I will continually monitor updates on competition to see how I will proceed with T in the future.
T pays out a hefty dividend, traditionally yielding between 5% and 6% annually. Most investors own T because of the consistent dividend payout, which T raises by roughly 2% per year. I am one of those investors. This is a "sleep at night" stock that has very low volatility. However, I see some potential issues with T's business going forward that may make sleeping a little less easy...
First, wireless competition is getting fierce. Verizon is the major competitor, but Sprint and T-Mobile are doing everything they can to steal subscribers from the "Big 2." Second, the cable subscription model is outdated. The consumer today does not want to pay for a bunch of junk. How do I know this? Because I am a consumer today, and I do not want to pay for a bunch of junk. I want ESPN to watch Duke basketball games...and that's about it. If I have to watch a show, which I very rarely do, I want to pay for that show and nothing more. I predict that I will be able to purchase exactly the programs that I want to watch for well under $100 a month in the near future. I would like to see T have a strategy for that competition.
T's position in my portfolio is that of a cash cow. I want to collect T's dividends every quarter without having to worry about wild fluctuations in the stock price. I expect T to underperform the market while the market is hot, but it will act as a buffer if the market turns sour.
What to watch for: Bond rates. This stock serves as a "bond market equivalent." This means that, while bond rates are low, investors will choose T to receive a desirable income. If bond rates rise significantly, some investors will leave T for the safer bonds. This will in turn increase the yield of T, making it more attractive. Catch-22.
Common Cents Take: T is a steady income, low volatility position has its place in my portfolio; however, I will continually monitor updates on competition to see how I will proceed with T in the future.
Monday, April 13, 2015
Restoration Hardware (RH)
Restoration Hardware (RH) is a luxury brand in the home furnishings marketplace, offering furniture, lighting, textiles, bathware, décor, outdoor and garden, as well as baby & child products.
RH offers a unique service: mass production of curated furnishings, etc. that previously existed in only fragmented offerings. That sounds cool and all, but honestly, I really don't care for their furniture all that much. Good thing, because it is mostly outside of my income level anyway. So why do I have a position in RH?
RH is revamping its retail locations to become full-scale galleries. This revamping dramatically increases RH's revenues and earnings attributed to the revamped store. RH is in the very early stages of this process and is already showing great dividends in earnings/revenues growth due to its retail strategy.
This is a somewhat pricey position, with a PE typically in the 30s. However, the estimated growth rate puts RH at a generally reasonable PEG ratio, and management has an intense focus on learning and improving on their practices. RH's management strives to be innovative in every aspect of the business. The long-term prospects of RH seem intact, which justifies the lofty PE to me.
This position trades wildly on very little (almost no) relevant news. Therefore, it is a great position to take advantage of the volatility. I like to buy and sell small chunks, in addition to maintaining my core position, as the share price fluctuates wildly and unreasonably.
What to watch for: Not much, really. Housing data, performance of "similar" companies like Williams Sonoma, retail data - sure, I guess. The only thing that really matters is that the long-term retail transformation of RH is intact.
Common Cents Take: RH is a great long-term, high growth play with ample opportunity to increase portfolio returns by taking advantage of the stock's volatility.
RH offers a unique service: mass production of curated furnishings, etc. that previously existed in only fragmented offerings. That sounds cool and all, but honestly, I really don't care for their furniture all that much. Good thing, because it is mostly outside of my income level anyway. So why do I have a position in RH?
RH is revamping its retail locations to become full-scale galleries. This revamping dramatically increases RH's revenues and earnings attributed to the revamped store. RH is in the very early stages of this process and is already showing great dividends in earnings/revenues growth due to its retail strategy.
This is a somewhat pricey position, with a PE typically in the 30s. However, the estimated growth rate puts RH at a generally reasonable PEG ratio, and management has an intense focus on learning and improving on their practices. RH's management strives to be innovative in every aspect of the business. The long-term prospects of RH seem intact, which justifies the lofty PE to me.
This position trades wildly on very little (almost no) relevant news. Therefore, it is a great position to take advantage of the volatility. I like to buy and sell small chunks, in addition to maintaining my core position, as the share price fluctuates wildly and unreasonably.
What to watch for: Not much, really. Housing data, performance of "similar" companies like Williams Sonoma, retail data - sure, I guess. The only thing that really matters is that the long-term retail transformation of RH is intact.
Common Cents Take: RH is a great long-term, high growth play with ample opportunity to increase portfolio returns by taking advantage of the stock's volatility.
Sunday, April 12, 2015
How much should I pay for a stock? Part 3
We're almost at the finish line. A few more definitions (BLAH!), some calculations, and a dash of common sense, and we'll finally have an answer to the question, "How much should I pay for a stock?"
As a quick refresher, we've discussed PE and PEG ratios, and we sort of know how to compare two stocks in a 1-on-1, no-holds-barred cage match to the death, but we still don't have an answer to our question. We need some sort of benchmark to compare to the specific stock we're evaluating. Well, the fine folks at Standard and Poor's (S&P) created such a benchmark for us in 1923, the S&P 500 index.
The S&P 500 Index (I'll refer to it simply as "the Index") is a conglomeration of 500 large US companies intended to represent the "market average." The Index is used as the primary benchmark to measure one's portfolio performance and to compare the valuations of specific stocks against the average market valuation. The Index is quoted in a dollar amount, just as an individual stock is. Although you cannot directly invest in the Index, products have been created for individuals to invest in that mirror the Index. Additional popular indices include the Dow Jones Industrial Average, which traditionally tracks primarily industrial companies, and the Nasdaq Composite Index, which traditionally tracks primarily tech companies.
Just as with individual stocks, PE and PEG ratios can be calculated for the S&P 500 Index. Because the Index includes 500 companies intended to represent the market average, the PE ratio for the S&P index can be assumed to be representative of the market average. Let's run through a quick example comparing PEs of an individual stock and the Index, and then we'll consider how the PEG ratio affects our evaluation.
Let's use Restoration Hardware (RH) for our example. You can find earnings estimates, expected growth rates, etc. for free on many financial sites, although you'll notice that the values between sources frequently differ. Yahoo Finance is one I use pretty frequently. According to Yahoo, at the time of this writing, RH has a forward PE of 30. I prefer to use the Wall Street Journal's forward PE for the S&P index (see the link in the previous paragraph), which is at 17.5 at the moment. RH looks like it is a bit less than twice as expensive as the Index. Ouch! We're not done yet, though. We need to consider the respective growth rates of RH and the Index.
Yahoo lists RH's 5 year estimated growth rate at 26% and the Index's at 7.4%. Using this information, RH has a PEG of 1.15, and the Index has a PEG of 2.36. The PEG of RH is substantially lower than that of the S&P 500 Index. As such, RH is likely justified in its higher PE ratio and likely has room for further growth. So, RH at its current PE and PEG, would likely be a good long-term purchase.
Common Sense Take: The forward PE is a pretty straightforward relative comparison tool. The PEG ratio, however, requires some judgement for use. CNBC's Jim Cramer often states that the maximum PEG ratio at which he will still consider purchasing a stock is at 2.0. Personally, I consider the PEG ratio a bit goofy. Normalizing a forward (estimated) PE ratio with an annualized 5-year percentage growth estimate is just too many estimates for me to abide by any hard PEG ratio rules. Therefore, I use the PEG ratio as just another metric to apply common sense to, and I interpret the ratio differently on a case-by-case basis. Finally! We now know how much we should pay for a stock!
Let's use Restoration Hardware (RH) for our example. You can find earnings estimates, expected growth rates, etc. for free on many financial sites, although you'll notice that the values between sources frequently differ. Yahoo Finance is one I use pretty frequently. According to Yahoo, at the time of this writing, RH has a forward PE of 30. I prefer to use the Wall Street Journal's forward PE for the S&P index (see the link in the previous paragraph), which is at 17.5 at the moment. RH looks like it is a bit less than twice as expensive as the Index. Ouch! We're not done yet, though. We need to consider the respective growth rates of RH and the Index.
Yahoo lists RH's 5 year estimated growth rate at 26% and the Index's at 7.4%. Using this information, RH has a PEG of 1.15, and the Index has a PEG of 2.36. The PEG of RH is substantially lower than that of the S&P 500 Index. As such, RH is likely justified in its higher PE ratio and likely has room for further growth. So, RH at its current PE and PEG, would likely be a good long-term purchase.
Common Sense Take: The forward PE is a pretty straightforward relative comparison tool. The PEG ratio, however, requires some judgement for use. CNBC's Jim Cramer often states that the maximum PEG ratio at which he will still consider purchasing a stock is at 2.0. Personally, I consider the PEG ratio a bit goofy. Normalizing a forward (estimated) PE ratio with an annualized 5-year percentage growth estimate is just too many estimates for me to abide by any hard PEG ratio rules. Therefore, I use the PEG ratio as just another metric to apply common sense to, and I interpret the ratio differently on a case-by-case basis. Finally! We now know how much we should pay for a stock!
How much should I pay for a stock? Part 2
In Part 1 of "How much should I pay for a stock?" we learned how to evaluate a PE ratio to make apples-to-apples comparisons of "cost" between stocks. However, if some fat-cat Wall Street fellow were to tell you that Restoration Hardware (RH), with a PE of 30, was cheaper than Visa (V), with a PE of 25, he wouldn't necessarily be lying to you.
What's the catch? The Wall Street fellow is considering the growth of the two companies when evaluating the "cost" of their respective stocks. In general, Wall Streeters care about three things when evaluating stocks/companies: growth, growth, GROWTH!!! And let's be honest. We as investors are no better. We all want to grow our portfolios (I hope), and therefore, we are equally as interested in growth. Let's consider some quick definitions so we can discuss this further.
Common Cents Take: As you can see, investing is simple math. Anybody who can multiply and divide can get rich quick. Why don't more people do this? Oh! I almost forgot what your original question was. So, "How much should you pay for a stock?" See you in Part 3, where I'll give you the tools to determine how much you should pay for a stock and, in doing so, debunk the notion that all you need to know is division and multiplication.
What's the catch? The Wall Street fellow is considering the growth of the two companies when evaluating the "cost" of their respective stocks. In general, Wall Streeters care about three things when evaluating stocks/companies: growth, growth, GROWTH!!! And let's be honest. We as investors are no better. We all want to grow our portfolios (I hope), and therefore, we are equally as interested in growth. Let's consider some quick definitions so we can discuss this further.
Trailing PE: the current price of a stock divided by the summed earnings over the previous four quarters. I'm not sure why this evaluation exists. I've never used it. If we could make money by looking at the past, there would be no need for time machines.
Forward PE: the current price of a stock divided by the summation of the expected earnings over the next four quarters. Now we're talking. Where is my stock going, not where has it been. We'll go into this more later, but just to ease you curious mind, analysts get paid to determine what a company is expected to make over the next four quarters.
PE to Growth Ratio (PEG): the forward PE ratio divided by the expected EPS growth (in percent), typically annualized over the next 5 years. This ratio allows us to consider the longer-term growth rate of companies in relation to their PE.I know, I know. How many ratios do those Wall Streeters need to justify their salaries? In the example above, RH does in fact have a higher PE, which I neglected to tell you was the forward PE, than V. However, RH is projected to grow EPS by 26% annually over the next 5 years, and V is projected to grow EPS by only 17% annually over the next 5 years. Let's perform the PEG ratio calculations to analyze the claim our Wall Street friend made to us.
RH: 30(PE) / 26(% growth) = 1.15
V: 25(PE) / 17(% growth) = 1.47There we have it. Our Wall Street friend, in his never-ending quest (addiction, really) for growth, has informed us that RH's expected EPS growth rate justifies its higher PE and makes RH "cheaper" than V.
Common Cents Take: As you can see, investing is simple math. Anybody who can multiply and divide can get rich quick. Why don't more people do this? Oh! I almost forgot what your original question was. So, "How much should you pay for a stock?" See you in Part 3, where I'll give you the tools to determine how much you should pay for a stock and, in doing so, debunk the notion that all you need to know is division and multiplication.
Thursday, April 9, 2015
How much should I pay for a stock? Part 1
Very good question. This is the essence of investing. How do I know when I am buying low, and how do I know when I am selling high? Well, let's get into it...
What if I told you my Apple (AAPL) stock at $125 is cheaper than my speculative Clean Energy Fuels (CLNE) stock at $5.50? Seems ridiculous, right? Let's define my usage of the word cheaper.
Obviously, I will pay over $100 more for 1 share of AAPL than I would for 1 share of CLNE. But there is another important aspect to consider. AAPL makes a profit and CLNE does not. In the investing world, we relate the value of a stock to its share price and earnings. This is called the "Price-to-Earnings" ratio, also known as the "PE ratio," or the "multiple."
We want to learn how to calculate this ratio, but first we need to define a few terms.
Common Sense Take: Take a breather. We're actually just getting started on this topic. Check out Part 2 to learn how this apple-to-apples comparison is only sort of an apple-to-apples comparison.
What if I told you my Apple (AAPL) stock at $125 is cheaper than my speculative Clean Energy Fuels (CLNE) stock at $5.50? Seems ridiculous, right? Let's define my usage of the word cheaper.
Obviously, I will pay over $100 more for 1 share of AAPL than I would for 1 share of CLNE. But there is another important aspect to consider. AAPL makes a profit and CLNE does not. In the investing world, we relate the value of a stock to its share price and earnings. This is called the "Price-to-Earnings" ratio, also known as the "PE ratio," or the "multiple."
We want to learn how to calculate this ratio, but first we need to define a few terms.
Revenues - the amount of money a company brings in by transacting for products and services. This is also known as "sales" or the "top line." In terms of lemonade, this is the amount of money I bring in every time I sell a glass of lemonade. If I sell a glass for $1, and I sell 10 glasses, I have brought in $10 of revenue.
Earnings - the amount of profit a company makes after subtracting the cost of doing business from the revenues. This is also known as the "bottom line." I have $10 of revenue from my lemonade sales, but now I need to subtract the cost of my lemons, sugar, water, and cups. Oh, and I have to pay the tax man. What I have left is my earnings.
Earnings per Share (EPS) - Lets say I have $4 of earnings after deducting my costs from the $10 of lemonade revenues. If we reminisce about getting Joe, Jack, Jock, and Jae to invest in the company, we remember that each of them had 1 share of the company worth $25. In this case, the total number of shares was 4. If we want to find the EPS, we must divide the earnings by the total number of shares issued.
EPS = $4/4shares = $1 per share
If we consider the other example, where each individual purchased 25 shares for a dollar each, we can calculate the EPS again.
EPS = $4/100shares = $.04 per shareNow we have both parts of our PE ratio. "P" is the price that the stock is quoted or the price at which you intend to purchase/sell it. "E" is the EPS. Let's run this calculation continuing our lemonade example.
For the first example, each share was purchased for $25. That is our P. The EPS was $1 per share. Therefore, our PE ratio is $25/$1 = 25.
For the second example, each share was purchased for $1. The EPS was $.04 per share. Therefore, our PE ratio is $1/$.04 = 25.It is no coincidence that these two PE values came out equal. This example shows that the PE ratio gives us an apples-to-apples comparison tool to use when evaluating all stocks.
Common Sense Take: Take a breather. We're actually just getting started on this topic. Check out Part 2 to learn how this apple-to-apples comparison is only sort of an apple-to-apples comparison.
What is a stock? How do I make money off of it?
What is a stock? C'mon, you're killing me. It's...this...thing, that I buy low and sell high.
Well, that was less than helpful. I like to relate this to a lemonade stand. I have a lemonade enterprise that I want to sell...and I mean NOW!! I go to my buds: Joe, Jack, Jock, and Jae. I give them this ridiculous sales pitch, and those suckers bite - I mean they really bite hard.
What I've offered is for them to fork up $25 a piece, a total of $100, and they can be part owner of my enterprise. I give them each 1 share of ownership, for a total of 4 shares. For this example, let's assume that I just want to run, but not own, the enterprise. The number of shares doesn't really matter. They could each have 25 shares at $1 a piece, or 1 share at $25 a piece. Either way, they own 1/4 of the company for $25 each. That is the simplistic form of a stock.
But how do I make money off of it?
Very good question. Let's continue with the lemonade enterprise scenario. Each individual owns 25% of the company, but how do they make money? I am going to continue running and growing the company with the $100 dollars the four owners invested, but the owners never make a dime if I don't give them any of it...and I am using every spare penny I have to grow the company. Joe is fed up. He wants a return on his investment.
Enter Jake. Jake wants in to the lemonade business. He convinces Joe to sell him his 1/4 share. Joe convinces Jake that his 1/4 share is worth $50 (rather than the $25 he invested) now that I have "grown the business." They make a deal, and Joe makes $25 on top of his initial $25 investment. Who knows if $50 was a fair price - that is Jake's problem (he probably analyzed the assets of the company, any debt, and theoretical future growth prospects before agreeing to it).
So..what's the point? Owning a stock is worthless until you sell it. You have to buy it and convince somebody that it is worth more than you paid for it to make money. The stock market is so plentiful with buyers and sellers that this happens a bazillion times a day. In the real world, you don't have to personally market your shares, companies you're invested in, "the news", and other sources do that for (and sometimes against) you. So you just move with the mass market, follow the price that people are convinced to buy and sell at by checking the stock quote, and decide if you are convinced to buy or sell at that price.
Well, one caveat. Some companies pay a monthly or quarterly ("3-monthly") dividend. Instead of pouring all available earnings back into the company, they have money left over. So they can decide to give some of it to each share owner. Pretty generous of those guys.
Common Sense Take: We are pretty much attempting to make money off of trading baseball cards...if you want to be cynical about it.
Well, that was less than helpful. I like to relate this to a lemonade stand. I have a lemonade enterprise that I want to sell...and I mean NOW!! I go to my buds: Joe, Jack, Jock, and Jae. I give them this ridiculous sales pitch, and those suckers bite - I mean they really bite hard.
What I've offered is for them to fork up $25 a piece, a total of $100, and they can be part owner of my enterprise. I give them each 1 share of ownership, for a total of 4 shares. For this example, let's assume that I just want to run, but not own, the enterprise. The number of shares doesn't really matter. They could each have 25 shares at $1 a piece, or 1 share at $25 a piece. Either way, they own 1/4 of the company for $25 each. That is the simplistic form of a stock.
But how do I make money off of it?
Very good question. Let's continue with the lemonade enterprise scenario. Each individual owns 25% of the company, but how do they make money? I am going to continue running and growing the company with the $100 dollars the four owners invested, but the owners never make a dime if I don't give them any of it...and I am using every spare penny I have to grow the company. Joe is fed up. He wants a return on his investment.
Enter Jake. Jake wants in to the lemonade business. He convinces Joe to sell him his 1/4 share. Joe convinces Jake that his 1/4 share is worth $50 (rather than the $25 he invested) now that I have "grown the business." They make a deal, and Joe makes $25 on top of his initial $25 investment. Who knows if $50 was a fair price - that is Jake's problem (he probably analyzed the assets of the company, any debt, and theoretical future growth prospects before agreeing to it).
So..what's the point? Owning a stock is worthless until you sell it. You have to buy it and convince somebody that it is worth more than you paid for it to make money. The stock market is so plentiful with buyers and sellers that this happens a bazillion times a day. In the real world, you don't have to personally market your shares, companies you're invested in, "the news", and other sources do that for (and sometimes against) you. So you just move with the mass market, follow the price that people are convinced to buy and sell at by checking the stock quote, and decide if you are convinced to buy or sell at that price.
Well, one caveat. Some companies pay a monthly or quarterly ("3-monthly") dividend. Instead of pouring all available earnings back into the company, they have money left over. So they can decide to give some of it to each share owner. Pretty generous of those guys.
Common Sense Take: We are pretty much attempting to make money off of trading baseball cards...if you want to be cynical about it.
Tuesday, April 7, 2015
Common Cents Investing
Welcome to Common Cents Investing. I know a bare minimum about investing, I'm sure. I'm an engineer by trade, I've never been to Wall Street, and I've never worked in the finance industry in any capacity.
I do, however, have a bit of common sense. I can also multiply, divide, and perform some pretty decent addition and subtraction. Oh, and I have the internet. Now, as I mix all those together, I plan to make some money off of it.
That's it. Easy enough. Sound interesting?
I plan to use this Common Cents Investing blog to organize my thoughts, record my transactions, and review how I behave in regards to managing a portfolio of 5 - 10 stocks. I already do this to some capacity on paper, but I have an increasing need for attention.
So here's how it's going to play out. I will go through a brief introduction to investing. I will explain how to research a stock, analyze relative valuation, open a trading account (kind of), and ultimately purchase a stock. Don't worry, even though it's investing, and I'm an engineer, I will only be using informal/conversational English, probably with some horrific grammar sprinkled in.
Stay with me. After we have those conversational tools in our investing tool box, I will explain some long-term methodologies that I use for investing, which I have found increasingly effective. I will explain my strategies for the 5 - 10 stocks I have in my portfolio, and I will record when and why I make transactions in these positions. And you will (potentially) follow along. Whatever you do with this information is irrelevant to me. I just want the attention.
Here comes some limitations. I by no means intend to represent myself as anything other than a novice investor. I by no means recommend that anybody follow my investing methodology or recommendations. I will fact check very little of the information I present. This blog is for informational and entertainment purposes only and should not be construed as professional or expert investing advice. Here goes nothing...go ahead...click the 101 tag...
I do, however, have a bit of common sense. I can also multiply, divide, and perform some pretty decent addition and subtraction. Oh, and I have the internet. Now, as I mix all those together, I plan to make some money off of it.
That's it. Easy enough. Sound interesting?
I plan to use this Common Cents Investing blog to organize my thoughts, record my transactions, and review how I behave in regards to managing a portfolio of 5 - 10 stocks. I already do this to some capacity on paper, but I have an increasing need for attention.
So here's how it's going to play out. I will go through a brief introduction to investing. I will explain how to research a stock, analyze relative valuation, open a trading account (kind of), and ultimately purchase a stock. Don't worry, even though it's investing, and I'm an engineer, I will only be using informal/conversational English, probably with some horrific grammar sprinkled in.
Stay with me. After we have those conversational tools in our investing tool box, I will explain some long-term methodologies that I use for investing, which I have found increasingly effective. I will explain my strategies for the 5 - 10 stocks I have in my portfolio, and I will record when and why I make transactions in these positions. And you will (potentially) follow along. Whatever you do with this information is irrelevant to me. I just want the attention.
Here comes some limitations. I by no means intend to represent myself as anything other than a novice investor. I by no means recommend that anybody follow my investing methodology or recommendations. I will fact check very little of the information I present. This blog is for informational and entertainment purposes only and should not be construed as professional or expert investing advice. Here goes nothing...go ahead...click the 101 tag...
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