Monday, August 31, 2009

Do you still think that the market is efficient?

If so, then please read this AP story from last Thursday. Fannie Mae, Freddie Mac, and AIG shsres have been on fire, even though they are worthless? Why? Speculation, momentum investing, hope, stupidity,and any number of other reasons have had a hand in this madness.

Or can you tell me why Motors Liquidation Company (MTLQQ.PK) can trade 51 million shares a day on average? For those of you not in the know, Motors Liquidation Company is the dregs that was left over from GM. It's what the government didn't want. The government took control of the good assets.

If some proponent of the Efficient Market Hypothesis can explain this to me, then please leave me a comment. My guess is that they would claim that the market is only efficient in the very long term. Well, what is the long-term? Wasn't Enron perpetrating a fraud for most of the 1990s? Wasn't Bernie Madoff able to fool investors and the SEC for decades?

Fraud is an extreme case though. No theory can adequately account for it. What about a situation where investors simply ignore the facts. Take for instance, the analyst scandals of the Internet boom era and the recent ratings agencies problems. These two groups have pretty thoroughly been proven to be conflicted, conformist, and inaccurate. Yet billions of dollars is still deployed based upon their recommendations. An analyst upgrade or downgrade can still move a stock or bond. Is this a case of collective insanity or just plain laziness? What would it take for equity analysts and the ratings agencies to hurt their credibility?

What about the SEC? Can an agency with limited funds and jurisdiction really police a Wall Street that is truly global-spanning and has billions if not trillions of dollars invested in technology and political influence?

I think that Michael Lewis and David Einhorn said it best in their New York Times op-ed piece from January of this year. It effectively demonstrates how greed, a base human emotion, often distorts market fundamentals. They also touch upon the agency problems that exist within the ranks of the ratings agencies and the SEC.

It seems to me that the EMH overlooks the humans' capacity to deceive themselves and others.

Friday, August 28, 2009

I'm holding my nose and buying Hampton Roads Bankshares


Hampton Roads Bankshares (HMPR) is a microcap bank holding company that operates community banks in southern Virginia and North Carolina. It is also a debt ridden carcass. It recently cut its dividend and cancelled a 32.5 million share stock offering without giving any reason. They swung to a loss in the most recent quarter, losing $42.6 million in the second quarter. If you look at the summary of risk factors from the August 10th 10Q, you will be positively frightened. This company is facing a number of difficulties. Loans and deposits are decreasing. The asset base is eroding. There have been significant changes in senior management. Non-performing loans increased over 50% from last quarter. The stock has basically been cut by 2/3 since the beginning of the year. So why do I like it?

Well, it's extremely cheap. It's trading at a 52-week low. It's trading at about 1/3 of book value. It's heavily shorted(10%), so there could be a short-covering pop coming soon. I like that they suspended the dividend. They need the cash. It's a responsible move by management.

This is basically betting that the company can get the capital it needs to ride out the storm.

In short, I don't think that thing can get much worse for the company. This is a classic point of maximum pessimism call. This is speculative and I'm not going to use just a tiny sliver of my portfolio in order to stake out this position. also, I'm going to slowly build a position, buying in chunks and using tight limit orders.

Heads, I win big, Tails, I don't lose much. That's my approach to speculation.

Thursday, August 27, 2009

Money Honeys is back!!!

It's been awhile since I compiled this list. Here's who's heating up the screen.

1. Erin Burnett
2. Trish Regan
3. Liz Claman
4. Jenna Lee
5. Alexis Glick
6. Margaret Brennan
7. Courtney Reagan
8. Michelle Caruso-Cabrera
9. Shibani Joshi
10. Dagen McDowell

Wednesday, August 26, 2009

Indian Stock Community

MoneyVidya.com is like an Indian CAPS. It looks like a great resource for learning about Indian stocks. Small Stock Tips is also focused on Indian equities.

China Crescent Enterprises and Enterprise Value Multiples

We shall continue with evaluating China Crescent Technologies (CCTR). Is the stock really as dirt cheap as it appears? Today, I'm going to examine CCTR's enterprise value in relation to revenue, EBITDA, and earnings.

Enterprise-Value-to-Sales (EV/Sales) measures how much you are paying for sales. Generally, the lower the number, the better. The formula for EV/Sales is simple; it's the enterprise value divided by revenue. Based upon the past year, the EV/Sales ratio for CCTR is 0.036. That seems extremely cheap, but we won't know for sure unless we compare it with other companies in this space.

According to Yahoo! Finance, Ingram Micro (IM) and Tech Data Corp (TECD) are competitors. These companies are much, much bigger than China Crescent, so this is not an apples to apples comparison. Still, it might shine some light on a best case scenario for CCTR. Both of their EV/Sales for the trailing twelve months is 0.06.

The Enterprise multiple is calculated by dividing the enterprise value by EBITDA. You can find EBITDA on the income statement. EV/EBITDA tells you roughly how long it would take to pay back the investment. For CCTR, it would be

$1,482,058/$1,330,000=1.11. The investment pays off in a year.

The enterprise multiple for both IM and TECD is around 4.

Finally, let's calculate the return on investment. That's done by dividing earnings by Enterprise value, a slight variation on calculating earnings yield. For CCTR, the return on investment would be 0.44. In other words, if you bought the company outright and retired the debts, 44% of your investment would be in earned income.

TECD's is 0.12 and IM lost money so this metric doesn't really apply.

So what we have here is a stock that is cheap based upon P/E, P/B, P/S, P/CF, P/FCF, EV/S, EV/EBITDA. Where are the flaws? I shall have to keep searching. My next stop is investor relations.

Tuesday, August 25, 2009

The enterprise value of China Crescent Enterprises

China Crescent Enterprises released their Q2 earnings last Friday. They also released a webcast. I've written previously about whether or not this stock is too good to be true. I mean, on the surface, it seems incredibly cheap. So now, I'm going to apply another valuation metric: enterprise value. Enterprise value gives you a better idea of the total cost of control of a company than simply using market capitalization. Market capitalization only measures equity, while enterprise value includes debt. After all, isn't a house worth the equity you've accumulated plus the mortgage? The same is true with a company. When you buy one you either assume its debts or retire them.

Figures were obtained from recent SEC filings for Q2 2009 and Yahoo! Finance.

China Crescent Technologies' enterprise value is approximately $1,482,058. How did I get that? I took the market cap ($305,691)- cash ($2,259,195) + total liabilities ($3,435,565)

Okay, so now we know how much the whole shebang costs. That's probably of very little use to you unless you are a corporate raider or looking to acquire the entire company for some reason.

In tomorrow's post, we'll learn how to properly apply this number in order to yield meaningful metrics.

Monday, August 24, 2009

OTC stocks


Sometimes on this blog, I talk about OTC stocks. I know that this isn't recommended. I know that there are a lot of scams and market manipulation. I know that many lack lengthy operating histories or significant share liquidity. The bid-ask spread can be a chasm. Still, there are also some really good, fast-growing under followed companies here. For instance, there are many legitimate, money-making Chinese stocks that are dipping their toes in a Western listing via the Over the Counter Bulletin Board and the Pink Sheets.

It is important to draw a distinction between the OTCBB and the Pink Sheets. The Bulletin Board generally has two types of companies listed on it.
Sometimes a stock has been delisted from a major exchange and is doing time down there until it gets its act together. In this way, the OTCBB can be a way station for companies on the way up or the way down. Other times, the a company just can't meet the strenuous listing requirements of the Big Board or NASDAQ. All companies on the OTCBB are still required to file all SEC and industry regulatory filings. Other than that, there are no listing requirements.

The Pink Sheets also have no minimum listing requirements. However, unlike the OTCBB, they do not require the filings with the SEC and other regulatory bodies. This can make next to impossible to find reliable information about companies listed here. However, there are some legitimate enterprises on the Pink Sheets. There are quite a few ADRs. For instance, BMW Group and Volkswagen both trade on the pink sheets. In recent years, new management has introduced a tiered system that it hopes will help distinguish the good from the bad.

Let me offer 5 guidelines that will help you when investing and trading these companies.

1. Do your homework. This is not as obvious a point as it seems. Do not follow tips you find on stock promotion websites. Look for SEC filings. Call their investor relations department. Google them. If you can't find reliable information, don't invest a single penny.

2. Don't trade stocks with average daily volumes of under 50,000 shares. Liquidity is an important factor, especially if you're trading. You want to be able to get in and out of a stock, especially out.

3. Look for stocks with narrower ask-bid spreads. This will be a big part of your costs. The bigger the spread, the more you'll pay.

4. Know why you're placing the order. Is this an investment or a trade? Do you have a price target? If it is a trade, don't get greedy and over stay your welcome. Get in, get out, and move on.

5. Don't forget about asset allocation. Don't go for broke trying to make a killing. Never risk more than 5% of your portfolio on a penny stock position. Speculation doesn't have to mean pushing all your chips into the middle of the table. You want to be able to walk away, whether it pays off or not.

Saturday, August 22, 2009

Liz Claman gives us the scoop on FICO changes


I love Liz Claman. I think that she's the hottest anchor on television. I try to work her into a blog post whenever I can. This just happens to be a time when it's pertinent.
On Tuesday, she spoke with FICO CEO Mark Greene. Not only are they changing the ticker symbol from FIC to FICO, but they're also changing how they calculate FICO scores.
This video also contains some important information on banks. He explains why banks aren't lending money and their preparations for the coming storm in credit card delinquencies.

Friday, August 21, 2009

Jon Markman is right

Markman's latest piece for MSN Money is excellent. However, I do agree that fear is playing a major role in the market right now. Fear truly is the enemy of great returns. It's not just about fear of loss. It includes fear of straying from the crowd

ProShares launches a new inverse ETF

ProShares is launching a new ETF that will allow you to short the long-term Treasury bonds. The ticker symbol will be TBF. Keep in mind, this is a new product and trades a small volume.

ProShares Short 20+ Year Treasury (TBF) is built to produce 100% of the inverse performance of the Barclays Capital 20+ Year U.S. Treasury Index for a single day, excluding fees and expenses.


Check out this bit of fine print from the ProShares website:

This ETF seeks a return that is either 300%, 200%, -100%, -200% or -300% of the return of an index or other benchmark (target) for a single day. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their ProShares holdings consistent with their strategies, as frequently as daily. For more on correlation, leverage and other risks, please read the prospectus
.

You can click here to read the prospectus.

Thursday, August 20, 2009

Great investing sites

You should check these out. The writing is great and the reasoning is sound.

Old School Value
Stingy Investor
The Graham Investor
Shadow Stock
Bear Market Central
iTulip.com
Safehaven

There are plenty more than this, but I felt that these don't get nearly as much pub in the blogosphere.

Wednesday, August 19, 2009

American Axle: the best house in a bad neighborhood?


I've been watching this company since May when it was trading in the low $3s. It's been a roller coaster ride since the spring. It was trading at $1.13 (this stock got as low as 29 cents in March!). Now it's well over $6. I've missed a huge gain by watching from the sidelines, but I still think that there's money to be made, if not in this stock, but the sector in general

A lot of good things have gone right for AXL in the last three months. They got a credit reprieve and GM is going to give them $210 million. Credit Suisse just upgraded them.
I know that auto manufacturing in this severely crippled, but it's not going to die.
DAN, ARM, and TEN deserve a second look. Beware, these companies have huge losses, little cash flow, and balance sheets that are still evolving. Still, all these companies are trading at fraction of sales.

Profits will not determine the short-term viability of these companies. Profits are a distant dream for these firms. Only one thing will move these stocks: restructuring. Positive news of covenants and credit facility extensions will lead to analyst upgrades and an uptick in investor sentiment. Monitor the price of credit default swaps.

This is a test with a huge curve; a 60% will get you a B+.

Tuesday, August 18, 2009

New 13-F Filing for Berkshire Hathaway


BRK-A released their 13-F detailing stock holdings.

Look, but don't touch. These securities may or may not be appropriate investments for you. Remember that Buffet bought these for Berkshire Hathaway, an insurance company, not for his personal portfolio. Even if he did buy these for himself, he probably has a different time horizon and financial goals than you do.

If you want to really get something out of reading a 13F, then try to put yourself in the shoes of the person who bought the securities. Here are a few helpful questions to ask yourself when looking at 13Fs.

What information was available at the time?
Would you have made the same purchase?
Which of these holdings would you sell if a better opportunity surfaced?
Which positions are new additions?
Which ones have been increased or reduced? Why?

When examining individual companies in the portfolio, don't just look at the how much the share price has appreciated. There are other metrics that matter. Has the book value increased?
What's happening with the margins? Are their seasonal patterns in the business cycle that are about to emerge? Is there a preponderance of one sector represented.

13Fs can be great tools for teaching you how to think about investments. You first have to get beyond the ticker symbols and start thinking about the motivation(s) of the investor.

Monday, August 17, 2009

Great day for investing


Indexes all over the world all down. The S&P 500 is off 2.25%. The FTSE is off 1.5%. The Shanghai Composite Index is down nearly 6%. The Nikkei is down over 3%. In fact, I can't find a major market index that is up today. I love it! This gives me a great opportunity to get in at really attractive prices. I'm going to stock up on Chinese stocks. I'm going to shove banks and insurance companies into my shopping cart. I feel like Nic Cage when he's shopping for liquor in Leaving Las Vegas.

It's days like these when real money is made. You won't know it until year down the road, but you'll be so grateful if you just made into the mass and start buying. I like CAF, CNO, and C at these prices.

Panic is an opportunity.

Saturday, August 15, 2009

More on China Crescent Enterprises

I first wrote about CCTR back on July 25th, 2009. The stock has more than doubled since then. I suspected that the company was too good to be true, but I didn't have time to really dig down and research. This post is a follow up. There will be more as I accumulate information.

Stockpreacher.com just released a "trading outlook" for CCTR.

http://stockpreacher.com/trading-outlook-for-china-crescent-enterprises-inc-cctr/#more-2433

Please read Stockpreacher.com's disclaimer/warning:

DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice.

The information contained in our report should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities. We distribute opinions, comments and information free of charge exclusively to individuals who wish to receive them.

Our newsletter and website have been prepared for informational purposes only and are not intended to be used as a complete source of information on any particular company. An individual should never invest in the securities of any of the companies profiled based solely on information contained in our report. Individuals should assume that all information contained in the report about profiled companies is not trustworthy unless verified by their own independent research.

Any individual who chooses to invest in any securities should do so with caution. Investing in securities is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Always research your own investments and consult with a registered investment advisor or licensed stock broker before investing.

Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements.

We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).


They are stock promoters. Sometimes stock promoters are pushing legitimate issues, sometimes they aren't. Stockpreacher.com is run by a guy named Paul A. Ebeling, Jr. I shall do some research to try and figure out if he ha owns any CCTR shares.

China Crescent might be a legitimate find, but the jury is still out.

Thursday, August 13, 2009

Are you really a contrarian?


Contrarian is probably one of the most overused labels in investing. Just about everyone likes to brag about how they went against the grain and made the call of the year or a lifetime. I think that there are probably significantly fewer real contrarians out there though. First of all, it's extremely hard to go against the crowd, in fact, it's against human nature. There are significant real and psychological rewards to going with the crowd. Secondly, going against the crowd often doesn't work out for the better. After all, you're betting against the the great mass of investors that move the market. Remember, John Maynard Keynes' famous line about the market can remain irrational longer than you can remain solvent? Raise your hand if you've lost money shorting a stock because your timing was just a bit off.

I'm going to list some of the great contrarian calls of the last decade. If you were in on them, than you're a far better (and richer)person than me.

Buying commodities in 1999.
Shorting tech stocks in 2000.
Buying AAPL in 2002.
Buying Chinese stocks in 2000.
Shorting Enron in 1999.
Shorting Lehman in 2008.
Shorting financials in 2007.
Buying the market in March of 2009.

Interestingly enough, Jim Rogers did three of these things. In fact, he was saying to short the money center banks back in 2006! That had to be painful, but ultimately very rewarding.

It's not easy being a contrarian. Think a little before you throw the term around loosely.

Wednesday, August 12, 2009

Take a look at Russia


Remember when the acronym BRIC had cache? That was before last year when emerging markets tanked even more than American and European indices. However, BRIC is back this year, none more so than Mother Russia.
Russian stocks have been seriously beaten down in the last year. Bad loans, low oil and natural gas prices, plus unemployment have seriously hurt the economy. Now is the time to start sorting through the wreckage. It's up about 60% YTD, but I think that will go higher as I predict commodity prices will firm up by the end of the year. Additionally, Russia is throwing as much money at the problem as possible.

One of the safest, easiest, and best ways to invest in Russia equities is through the Market Vectors Russia ETF (RSX). The ETF is highly weighted towards energy and raw materials. I don't mind that since I still believe in the secular commodities bull. Even if you don't this ETF is cheap. It's trading for 30%under book value, a 0.24 P/S, and a P/CF of 1.41.

Another way that will give you exposure to Russia is the Templeton Russia & Eastern Europe Fund (TRF). It's a closed-end fund with greater geographic diversity and less exposure to commodities. It's primarily (about 31%) invested in telecom. I would stay away from the fund however. It's trading at a huge premium (39%) to it's NAV. Plus the expense ratio is 1.82%, too rich for my blood.

Tuesday, August 11, 2009

What you should do if you think this rally is real?

This advice applies if you just think that there's a few tickets on the clock before it hits midnight. Personally, I think that what we've seen recently has been a sucker's rally. However, even if I'm right, it doesn't mean that someone can't make good or even great money in the short-term taking the other side of my trades.

If you think that the jig isn't up, I suggest stocking up on small cap crap stocks. Craps stocks come hurtling out of their bottoms during rallies like this. Take a look at two homebuilders who many thought would go under, Beazer Homes (BZH) and Orleans Homebuilders (OHB). Both these stocks were and still are heavily shorted and deservedly so. Look at a YTD chart of these stocks compareing with the S & P 500 and the ETF based on the homebuilder's index. While the former have been flat, OHB is up about 300% and the BZH is up about 150%.

Be careful, after all, you're going to be looking for crappy stocks, so don't be surprised if awful little banks and biotechs with no drugs that burn through cash pop up on the screen. A stock like that I think fits this bill perfectly is McClatchy (MNI). It's trading around $2. McClatchy used to be one the premier newspaper chains in this country. You can probably fill in the rest of the story.
Anyway, it has a terrifying debt to equity ratio of 25 and lost 22 cents a share last quarter, yet it is up 193% in the last six months! This is an extremely volatile stock, but I think it's got the legs for another big move up.

Thursday, August 6, 2009

More on China Education Alliance

RedChip.com is really promoting this stock. Check out this post. I really think that this is a chance to get in on Apollo or Career Education before they amassed a huge following.

Tuesday, August 4, 2009

Cashing in on online learning in China

China Education Alliance (CEU)is an online education and onsite training company based in the People's Republic of China. This is a market that is growing by about 20% a year. They make test materials and study guides, while also providing vocational and certification training. Right now, it has a P/E of 10.7 and an annual EPS growth rate of 54%. That's an astounding PEG ratio of 0.20! Insiders own over half the stock. It has no long-term debt.

Let me mention a few caveats. It is a microcap stock that trades on average 13K shares per day. It has a beta of 2.17. Please build a position in this stock slowly and use limit orders.

Monday, August 3, 2009

Is the S&P 500 breaking 1000 really important?

What about the Nasdaq breaking 2000? Yawn. It is non-stories like these that make me shake my head. It almost makes me want to learn more about the weird, sad end to Michael Jackson's life than read about what a milestone this is. Is it psychologically important? I don't really know what that means. I suppose it means that people are very attached to round numbers and get happy when you pass a big one. These stories always include an optimistic quote from a fund manager or two. This is a great example of Mr. Market changing his mind. Why? I don't know. People will point to stronger growth overseas or a boost from the manufacturing sector, but no one really knows exactly why. They just know that the bulls won today. Don't believe the hype. Use days like these to exit positions you no longer like on more favorable terms.