Common Cents purchased LUV today at $37.5 after an approximate 6% intra-day decline. The decline was likely based on news of probable increases in oil prices and capacity increases by airliners, particularly Southwest. Capacity increases, analysts justify, will increase supply at a constant demand, and, consequently, ticket prices (i.e. PRASM) will decline. Southwest's management seems to think that demand AND supply are increasing, so the capacity increase is justified.
Common Cents Take: Great airline for customers. Great company for employees. Great execution by management. None of these change with speculation on the direction of oil prices and PRASM.
Going forward, I will look to unload this chunk above $41, a 9%+ increase.
Wednesday, May 20, 2015
RH Sale @ "$92"
I sold my June 19 2015 $80 call option today for $12.00. The "$92" in the post heading alludes to the $80 strike price plus the $12.00 sale price. This was the first option bought and sold for the Common Cents Portfolio, so I'd like to review my two strategies for trading around my position: options vs. regular shares.
On April 29, Common Cents purchased an $11.00 call option. I will assume RH was @ $88.50 (it ranged between $87.5 and $90.7 that day) at that time and that I purchased my usual lot at that price. Typically, I would need to earn 8% on my typical total purchase amount (i.e. share price multiplied by number of shares) before I would be willing to sell for a profit. That means that RH would have to increase to a price of $95.60 before I would sell. However, to earn an equal return in total dollars as the stock purchase option, I bought an $11.00 call option and sold it for $12.00. When my option hit $12.00, RH share price was at $91.50, or an increase of 3.4% from the original $88.50 price.
In summary, when trading options, I was able to get an equal return in total dollars with a 3.4% increase in share price relative to an 8% increase in share price for the stock purchase option. Pretty good. The flip side is that owning the option increased the volatility of my portfolio as a whole. It was great when the option increased in value, but it was also tough to watch when it decreased.
The strategy of purchasing an option with an exercise date well over a month into the future (i.e. June 19 call purchased on April 29), and a strike price well below the current share price (i.e. $80 strike vs. $88.50 share price), seemed to be a conservative approach. I will look to make a similar trade when RH's share price decreases below $90 again.
On April 29, Common Cents purchased an $11.00 call option. I will assume RH was @ $88.50 (it ranged between $87.5 and $90.7 that day) at that time and that I purchased my usual lot at that price. Typically, I would need to earn 8% on my typical total purchase amount (i.e. share price multiplied by number of shares) before I would be willing to sell for a profit. That means that RH would have to increase to a price of $95.60 before I would sell. However, to earn an equal return in total dollars as the stock purchase option, I bought an $11.00 call option and sold it for $12.00. When my option hit $12.00, RH share price was at $91.50, or an increase of 3.4% from the original $88.50 price.
In summary, when trading options, I was able to get an equal return in total dollars with a 3.4% increase in share price relative to an 8% increase in share price for the stock purchase option. Pretty good. The flip side is that owning the option increased the volatility of my portfolio as a whole. It was great when the option increased in value, but it was also tough to watch when it decreased.
The strategy of purchasing an option with an exercise date well over a month into the future (i.e. June 19 call purchased on April 29), and a strike price well below the current share price (i.e. $80 strike vs. $88.50 share price), seemed to be a conservative approach. I will look to make a similar trade when RH's share price decreases below $90 again.
Tuesday, May 12, 2015
YTD Performance Update: May 2015
YTD performance (as of 4/30/15): +5.35%
S&P performance (as of 4/30/15): +1.92%
Common Cents Portfolio is up by 3.43%!!
Portfolio Composition by Position:
S&P performance (as of 4/30/15): +1.92%
Common Cents Portfolio is up by 3.43%!!
Portfolio Composition by Position:
AAPL: 12%
RH: 12%
V: 9%
CLNE: 7%
BP: 7%
AGNC: 5%
LUV: 5%
HD: 4%
T: 5%
GLD: 3%
CASH: 32%Portfolio Composition by Sector/Industry (excluding cash):
Energy: 22%
Technology: 20%
Retail: 19%
Financial Services: 15%
Real Estate: 8%
Industrials: 8%
Communication Services: 8%
Sunday, May 10, 2015
Initiating a Position
Now that we have all the tools we need to value stocks, we can finally develop a method for researching a potential new position within our portfolio. There are a few very important particulars to research about your company/stock of interest: how it makes money, how well it has done in the past at making money, what sector/industry it belongs to, and what factors can move the stock in either direction.
If you have an online brokerage, such as Fidelity, Scottrade, or E*Trade, you probably have research reports available to you at no cost. For a great majority of larger companies, Standard & Poor's publishes a report that outlines a lot of basics on your company, such as how it makes money, what factors have developed over history that have swayed the company's performance, what sector/industry it belongs to, what it's peer companies (competitors) are, and the S&P analyst's commentary on future performance. This is usually a good first stop to get a crash course on your prospective investment.
The 10-K SEC filing is a particularly cumbersome source that can have some very detailed information pertaining to how a company makes money. The 10-K is a yearly filing that describes any and all information that you are interested in or never wanted to know. I like to check the "risk factors" section to identify potential risks, obviously, and to develop a list of important metrics to keep track of. For instance, if a risk factor describes the heavy use of debt to fund operations until revenues grow substantially, I would keep track of the debt on the balance sheet and any news/analysis pertaining to such.
It is equally, or even more, important to understand the industry/sector of your prospective position and what factors influence that industry as it is to understand company-specific influences. Most of a stock's price change will be influenced by its industry. If you own an oil stock, and oil goes down, no matter what oil stock you own, it will go down as well. There's simply no way around it. The best you can hope for is that it will go down less than comparable oil stocks, and when oil turns favorable again, that it will go up more.
Once you have an understanding of how your company makes money, and what factors influence the stock price, you will then want to check on management's execution. The best resource for this, in my opinion at least, is to read the earnings conference calls. SeekingAlpha.com is my sole resource for these transcripts. You can gain access to insights from management as well as the short-term concerns that are on analysts minds during the call. You may even want to read the most recent two or three to see how management's dialogue has changed. News and research articles can be a good resource to help gauge how the investment community has received the earnings releases.
Now that you have a good gauge on your prospective company, you may want to compare it to its competitors. You can compare earnings histories, management's growth plans, valuations/growth, and any other relevant information. If you know you want to have a position in the oil sector and have a company in mind in which you'd like to invest, you may want to consider that a competing company in the oil field may be better run and have cheaper valuation metrics.
Once you learn how your company makes money, what factors have influenced it recently, and what factors will potentially influence it in the future, you are ready to make your first purchase! You may be eager to make this purchase, but you can do yourself a huge favor if you decide on a fair valuation to purchase the stock at and wait until it reaches that valuation.
Common Cents Take: While it is exciting to establish a position, it is very important to do your homework on the company prior to making your purchase. If you do not perform the research, you will not have conviction (at least justifiable conviction) in the stock. The market will easily bluff you out of your position with misdirection when you could be adding to your position at a great bargain. And remember, equally important as conviction is valuation. I really love Starburst, but I don't plan on buying a pack for $30. Alright, enough chatter-let's open that account and make that purchase!
If you have an online brokerage, such as Fidelity, Scottrade, or E*Trade, you probably have research reports available to you at no cost. For a great majority of larger companies, Standard & Poor's publishes a report that outlines a lot of basics on your company, such as how it makes money, what factors have developed over history that have swayed the company's performance, what sector/industry it belongs to, what it's peer companies (competitors) are, and the S&P analyst's commentary on future performance. This is usually a good first stop to get a crash course on your prospective investment.
The 10-K SEC filing is a particularly cumbersome source that can have some very detailed information pertaining to how a company makes money. The 10-K is a yearly filing that describes any and all information that you are interested in or never wanted to know. I like to check the "risk factors" section to identify potential risks, obviously, and to develop a list of important metrics to keep track of. For instance, if a risk factor describes the heavy use of debt to fund operations until revenues grow substantially, I would keep track of the debt on the balance sheet and any news/analysis pertaining to such.
It is equally, or even more, important to understand the industry/sector of your prospective position and what factors influence that industry as it is to understand company-specific influences. Most of a stock's price change will be influenced by its industry. If you own an oil stock, and oil goes down, no matter what oil stock you own, it will go down as well. There's simply no way around it. The best you can hope for is that it will go down less than comparable oil stocks, and when oil turns favorable again, that it will go up more.
Once you have an understanding of how your company makes money, and what factors influence the stock price, you will then want to check on management's execution. The best resource for this, in my opinion at least, is to read the earnings conference calls. SeekingAlpha.com is my sole resource for these transcripts. You can gain access to insights from management as well as the short-term concerns that are on analysts minds during the call. You may even want to read the most recent two or three to see how management's dialogue has changed. News and research articles can be a good resource to help gauge how the investment community has received the earnings releases.
Now that you have a good gauge on your prospective company, you may want to compare it to its competitors. You can compare earnings histories, management's growth plans, valuations/growth, and any other relevant information. If you know you want to have a position in the oil sector and have a company in mind in which you'd like to invest, you may want to consider that a competing company in the oil field may be better run and have cheaper valuation metrics.
Once you learn how your company makes money, what factors have influenced it recently, and what factors will potentially influence it in the future, you are ready to make your first purchase! You may be eager to make this purchase, but you can do yourself a huge favor if you decide on a fair valuation to purchase the stock at and wait until it reaches that valuation.
Common Cents Take: While it is exciting to establish a position, it is very important to do your homework on the company prior to making your purchase. If you do not perform the research, you will not have conviction (at least justifiable conviction) in the stock. The market will easily bluff you out of your position with misdirection when you could be adding to your position at a great bargain. And remember, equally important as conviction is valuation. I really love Starburst, but I don't plan on buying a pack for $30. Alright, enough chatter-let's open that account and make that purchase!
AAPL: BUY; PT $160; 2Q15 Update
AAPL: 5/10/15; $127.62
From Thomson Reuters I/B/E/S Estimates:
S&P EGR: 7.19%
AAPL reported earnings on Monday, April 27. All-in-all, it was a great quarter, as far as I'm concerned. AAPL increased the dividend, increased its authorization for share buy backs, reported a crazy amount of iPhones sales, reported large increases in China revenue, and, well, read the transcript-it's not my job to repeat it for you!
The facets of the call that I was most encouraged by were AAPL's growth in China, commentary on ResearchKit, and reviews on the Apple Watch. The growth in China is a huge benefit for AAPL shareholders, as it is a great way to rebut the "law of large numbers" theory that says AAPL cannot continue to grow because it is already too big. China's top two mobile providers both surpass the subscribers of AT&T and Verizon combined. In addition, a large proportion of China's mobile subscribers are using 3G phones. This means there is significant opportunity for AAPL to capture user upgrades to 4G iPhones.
The ResearchKit commentary was exciting, because it shows that AAPL is continuing to create solutions, particularly in the highly lucrative medical field. The following is taken from the recent earnings call:
Common Sense Take:
From Thomson Reuters I/B/E/S Estimates:
Forward Earnings: 9.15
Forward PE: 13.95
Earnings Growth Rate (EGR): ~13%
PEG Ratio: 1.07S&P Forward PE: 17.95
S&P EGR: 7.19%
AAPL reported earnings on Monday, April 27. All-in-all, it was a great quarter, as far as I'm concerned. AAPL increased the dividend, increased its authorization for share buy backs, reported a crazy amount of iPhones sales, reported large increases in China revenue, and, well, read the transcript-it's not my job to repeat it for you!
The facets of the call that I was most encouraged by were AAPL's growth in China, commentary on ResearchKit, and reviews on the Apple Watch. The growth in China is a huge benefit for AAPL shareholders, as it is a great way to rebut the "law of large numbers" theory that says AAPL cannot continue to grow because it is already too big. China's top two mobile providers both surpass the subscribers of AT&T and Verizon combined. In addition, a large proportion of China's mobile subscribers are using 3G phones. This means there is significant opportunity for AAPL to capture user upgrades to 4G iPhones.
The ResearchKit commentary was exciting, because it shows that AAPL is continuing to create solutions, particularly in the highly lucrative medical field. The following is taken from the recent earnings call:
"And last month we announced ResearchKit, an open source software framework that helps doctors and scientists gather data from medical research participants more efficiently and accurately using iPhone applications. The response so far has been simply amazing, far exceeding our expectations. The first research apps developed using ResearchKit study asthma, breast cancer, cardiovascular disease, diabetes, and Parkinson’s disease, and have enrolled over 60,000 iPhone users in just the first few weeks of being available on the App Store. Over 1,000 researchers have contacted us expressing interest in performing studies through ResearchKit. We think these types of solutions have the potential to revolutionize medical studies in life-changing ways, and we’re proud that Apple is helping make this possible."A close relationship with the medical field could bode well for future medical functionality of the Apple Watch. Speaking of, according to Apple CEO Tim Cook, everybody loves the watch so far. I maintain that this product will not be a game changer initially, but the potential uses of the watch are enormous, especially in the health/medical field.
Common Sense Take:
AAPL is undervalued relative to the PE of the S&P but is a far better than average company. While growth estimates for AAPL are not significantly higher than that of the S&P, I don't feel like the estimates currently include any medical functionality breakthroughs (rightfully so). I feel like AAPL's growth will more likely accelerate than decelerate due to its track record and future prospects. And if not, unleash the cash (i.e. increase dividends)!!
Common Cents maintain its BUY opinion on this position and establishes a price target of $160, assuming a PE ratio of 17.5 is conservative given the great culture, long-term track record, potential for major breakthroughs in growth, and ability to return cash to shareholders if growth slows. The assumed PE is below the current near-18-PE of the S&P, as I see the potential for a "correction" (sell-off) of the overall market after its extended duration of growth. In addition, the lower assumed PE of AAPL is warranted given the polarizing nature of this position with investors.
Going forward, I hope to sell part of Common Cents's position when the share price exceeds $140 to reduce the position to the target allocation.
Friday, May 8, 2015
Clean Energy Fuels Corporation (CLNE)
Clean Energy Fuels Corporation (CLNE) is an innovative company that intends to replace gasoline and diesel vehicle fuel with natural gas (natgas). Natgas is reported as a cleaner and less expensive fuel option than the current widely adopted vehicle fuels.
CLNE is highly speculative. It currently does not earn a profit and is attempting to transform an entire fuel market single-handedly. In order to do so, CLNE has made big bets on the adoption of natgas fuel for trucking fleets by constructing a nationwide network of fueling centers. However, the slow switch to natgas by long-haul trucking fleets has made this initiative highly unprofitable, so far.
It's not all bad news though. CLNE has an established presence in air port transit (i.e. taxis and shuttles), refuse (i.e. trash trucks), and public transportation (i.e. busses). In addition, CLNE recently partnered with NG Advantage to supply industrial and medical facilities, among others, with on-site natgas trailers for use in power generation. The on-site natgas trailers replace fuel oil, which is more expensive, without the need to construct a physical pipeline to the facilities.
All-in-all, the established markets, slowly progressing markets, and new initiatives have brought CLNE closer to profitability. CLNE has an established presence in this industry; however, it is not unforeseeable that a large oil & gas company can enter the market and disrupt CLNE's plans. It is also not unforeseeable that a large oil & gas company can enter the market and quickly "catch up" by purchasing CLNE.
CLNE is speculative in the fact that it does not produce a profit. Therefore, traditional valuation using PE and PEG ratios are not helpful. Valuation by overall market capitalization is not overly useful, as CLNE is pretty much a one-man wolf pack in this industry. I invest in CLNE knowing that it is a high-risk stock, but I believe strongly that cheaper and cleaner fuel is in-line with long-term trends in business and society.
What to watch for: Press releases of major deals, updates on CLNE's path to profitability, and oil prices. CLNE issues periodic press releases summarizing the major fueling/construction deals they sign and how accretive the deals are estimated to be in terms of gallons sold. These releases have a major short-term influence on the stock price. Profitability is the major issue on investors' minds, so it is important to keep track of CLNE's progress through the quarterly earnings reports. CLNE's stock price has had a high correlation to oil prices in the second half of 2014 and first half of 2015. The spread between natgas and gasoline/diesel typically decreases when oil prices decline; however, this metric is not overly important for the long-term path to profitability of CLNE.
Common Cents Take: This stock is risky, volatile, and difficult to form strong conviction in. However, the benefits of natgas as a fuel are in-line with long-term influences in business and society. Therefore, the risk of owning CLNE is justified by the long-term prospects.
CLNE is highly speculative. It currently does not earn a profit and is attempting to transform an entire fuel market single-handedly. In order to do so, CLNE has made big bets on the adoption of natgas fuel for trucking fleets by constructing a nationwide network of fueling centers. However, the slow switch to natgas by long-haul trucking fleets has made this initiative highly unprofitable, so far.
It's not all bad news though. CLNE has an established presence in air port transit (i.e. taxis and shuttles), refuse (i.e. trash trucks), and public transportation (i.e. busses). In addition, CLNE recently partnered with NG Advantage to supply industrial and medical facilities, among others, with on-site natgas trailers for use in power generation. The on-site natgas trailers replace fuel oil, which is more expensive, without the need to construct a physical pipeline to the facilities.
All-in-all, the established markets, slowly progressing markets, and new initiatives have brought CLNE closer to profitability. CLNE has an established presence in this industry; however, it is not unforeseeable that a large oil & gas company can enter the market and disrupt CLNE's plans. It is also not unforeseeable that a large oil & gas company can enter the market and quickly "catch up" by purchasing CLNE.
CLNE is speculative in the fact that it does not produce a profit. Therefore, traditional valuation using PE and PEG ratios are not helpful. Valuation by overall market capitalization is not overly useful, as CLNE is pretty much a one-man wolf pack in this industry. I invest in CLNE knowing that it is a high-risk stock, but I believe strongly that cheaper and cleaner fuel is in-line with long-term trends in business and society.
What to watch for: Press releases of major deals, updates on CLNE's path to profitability, and oil prices. CLNE issues periodic press releases summarizing the major fueling/construction deals they sign and how accretive the deals are estimated to be in terms of gallons sold. These releases have a major short-term influence on the stock price. Profitability is the major issue on investors' minds, so it is important to keep track of CLNE's progress through the quarterly earnings reports. CLNE's stock price has had a high correlation to oil prices in the second half of 2014 and first half of 2015. The spread between natgas and gasoline/diesel typically decreases when oil prices decline; however, this metric is not overly important for the long-term path to profitability of CLNE.
Common Cents Take: This stock is risky, volatile, and difficult to form strong conviction in. However, the benefits of natgas as a fuel are in-line with long-term influences in business and society. Therefore, the risk of owning CLNE is justified by the long-term prospects.
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