Monthly Archives: July 2013

selling a stock (i): super-sized position

July 24, 2013 By in Portfolio management, selling a stock Tags: , , , , , Leave a comment

what is super size in an equity position?

Let’s take an extreme example.  Say an investor does an asset allocation plan in mid-2003.  He decides to put 10% of his equity money into AAPL and the rest into an S&P 500 index fund.  He holds until the end of 2007.

What does his equity portfolio look like then?

AAPL has gone up 2000%;  the S&P has gone up 18%.  So his portfolio has become 65% AAPL and 35% the S&P.  In other words, he no longer has a portfolio of stocks.  He has a position in AAPL (which is giving a big shot in the arm to his wealth) plus bells and whistles.

what’s wrong with that?

The potential problem is that, although a good part of the investing game is to make as much money as possible, another important consideration is diversification–or protecting yourself against achieving a very bad outcome.  Having all your eggs in one basket is okay–unless/until the handle breaks and the eggs fall out.

In addition, sadly, not every stock is an AAPL.  For every AAPL, there are a ton of NOKs or BBRYs.  Suppose you pick wrong.

Also, the reality is that most growth stock rocketship rides last about five years.  After that, either competitive response or technology/fashion change halts their advance and most times sends them plunging back to earth.

The best (a small subset) of these high fliers can reinvent themselves once or twice and thereby add additional time to their fast growth days. AAPL, for example, was the iPod company in the early 2000s and the iPhone company in the second half of the decade.  But eventually even the most creative runs out of fuel and morphs into the equivalent of present-day MSFT, WMT or CSCO.

how much exposure is too much?

A lot depends on an individual’s age, financial situation, risk tolerance and willingness to pay almost obsessive attention to any large positions.

As for my personal approach, I consider myself to be an aggressive investor.  Still, most of my equity money is either in passive products or managed by others.  My largest position is around 6% of the total–and it’s in an industry I’ve been following for over twenty years and is spread over several companies I know very well and whose operations/stock prices I watch daily.

six reasons for selling a stock you hold

July 23, 2013 By in selling a stock Tags: , , , , Leave a comment

Selling an individual stock is either the easiest thing or the hardest thing for any investor to do.

Selling is easy when:

–you’ve found a similar stock to replace it that’s cheaper and has better growth potential

–you bought the stock of a mature company because the price was temporarily depressed.  The share has rebounded and reached the price target you had in mind when you bought it

–the stock has been so successful that it’s reached such a large size relative to everything else you own that the size itself has become a risk

Selling is hard when:

–you become emotionally attached to a stock, forgetting that investing is an economic activity you’re doing to fund your retirement or send your kids to college

–you’ve made a mistake, and are in denial

–you’ve found a true growth company, whose stock has been a rocket ship ride so far.  You know, however, it will come back to earth –hard–when it goes ex growth but don’t know how to identify the transition.

More on this over the next few days.

 

thinking about the second half

July 22, 2013 By in Current Market Thoughts, Portfolio management, Recent Market Action, Strategy Tags: , , , , , Leave a comment

I’ve been staring at this page for a while, trying to figure exactly what to put down.  Then I realized that my inaction neatly sums up what I think the consensus view is about stocks for the second half of 2013.  Gains have been so strong since January 1st that most equity portfolio managers can’t imagine that the second half will bring more gains.  They mostly intend, I think, to nurse the gains they already have into autumn and then coast to the finish line by making their portfolios look as much  like their benchmark index as their clients will let them.

I’m caught between two conflicting ideas.

On the one hand, the stock market as a whole looks reasonably valued.  Stock have weathered the rise in payroll taxes at the beginning of the year, the imposition of the sequester and the announcement by the Fed that it’s warming up to being raising interest rates.  Earnings growth next year will be flattered both by healthier economies around the globe and the absence of payroll tax hikes and the sequester as depressants.  And history has shown that the S&P goes sideways to up as the Fed raises interest rates to normal from recessionary emergency lows.  That’s all good.

On the other hand, I’ve been making a big effort to find new stocks to buy but I’m not bowled over by the cheapness of the candidates I’m turning up.  I’ve added one or two to my holdings recently, but nothing has really started to work so far.  That’s bad enough to outweigh the good–except that everyone goes through periods when he doesn’t see the sweet spots of market activity very well.  So this could be me.  And, except for a brief bout of nervousness a couple of months ago, I’ve been happy to remain fully invested.

I haven’t been hearing or reading about market strategists who are seeking to trumpet their bullish views, either.  One exception–Sam Stovall, chief equity strategist for S&P.  He’s another proponent of the flat-to-up thesis.  But he’s more bullish than I am.  He says that there’s a good chance the S&P could be up by another 5% by yearend.  What’s most interesting about his view is that Mr. Stovall has had his finger on the pulse of the market more solidly than anyone else this year.  In January he was calling for a 20% increase in the S&P for 2013–a number I thought was a very big stretch.  It’s comforting that the “hot hand” continues to think that risks are to the upside.

 

Intel’s 2Q13–the waiting game continues

July 19, 2013 By in earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , , Leave a comment

2Q13 earnings

Intel (INTC) reported 2Q13 earnings results after the close on Wednesday. Revenue came in at $12.8 billion, down 5.1% year on year.  Earnings per share were $.39, flat quarter on quarter but off by 28% from INTC’s performance in 1Q12.  The figures were in line with the company’s previous guidance.

The company also lowered guidance for the second half, saying that this normally seasonally stronger period, while up vs. the first six months, won’t show its usual revenues gain.  INTC now sees full-year revenues for 2013 as flat–or about 2% lower than its previous view.

How so?

The cloud continues its explosive growth.  The server business is fine.  But the PC market is weaker than INTC expected.  For the first time INTC sees PCs as being as soft as consultants Gartner and IDC do.

During the quarter, INTC bought back 23 million shares of stock, paying an average of $23.91 each for them.

INTC shares were down almost 4% yesterday on the news.

the near-term investment case hasn’t changed much…

The big question is still whether the newest generating of INTC microprocessors, the first designed especially for mobile devices, will gain widespread acceptance.  A sub-plot, or maybe a necessary condition for this to happen, is the question of whether manufacturers of computer devices and operating systems are going to be able to deliver new “wow factor” products that people want to buy.

 

I’m content to hold INTC shares to see what happens, even though the tone of INTC’s comments suggests to me that we won’t see the new chips in full flower until early 2014.

..but INTC may be remaking itself in a more fundamental way

Yes, what I’m about to write may be making mountains out of molehills–but that’s what analysts do.

It looks to me that new CEO Brian Krzanich believes INTC is not in one, but rather in two, separate but complementary businesses.  One is researching and designing proprietary computer chips.  The other is manufacturing chips, either for itself or for others.

Although promoting foundry operations to equal status with making x86 chips is a simple and sensible change of viewpoint, it’s also potentially earthshaking for some INTC veterans.

I can imagine a lot of possible reasons (some of them mutually incompatible) for making this change of focus, but two consequences stand out to me.  Both derive from the fact that INTC is by far the most accomplished chip manufacturer in the world–one whose edge over the competition is increasing:

–to the extent that INTC picks and chooses the firms it makes chips for, it may be trying to turn the ARMH vs. INTC decision into an “eco-system” one.  A device maker can either have INTC parts + very fast, highly compatible chips from its partners or ARMH + a hodge-podge of less well-made, not so compatible parts from others.  Presumably this tilts the playing field considerably in INTC’s favor.

–investors like foundries better than chipmakers.  Look at the PE multiple on TSMC vs. INTC.    TSMC is 10% higher–even without considering the quirkiness of TSMC’s financials.

 

 

contribution margin

July 18, 2013 By in Accounting, depreciation, three sets of books Tags: , , , , , , , Leave a comment

several sets of corporate books

As I’ve written in a previous post, publicly listed companies have three sets of books:

–financial reporting books, which tend to portray a rosy picture to shareholders,

–tax books, that tend to show a relatively grim picture of profitability to the taxman, and

–management control or cost accounting books, by which the company is actually run.

Contribution margin is an important concept for this last set of books, the management control ones.

what contribution margin is 

The first thing to be clear on is that people call contribution margin is not always a margin, that is, a percentage.  More often a contribution margin is expressed in absolute dollar amounts.  Don’t ask me why.

But what is it?

It’s the amount by which the revenue from selling an item exceeds the direct cost of production and thus “contributes” to defraying corporate overhead. It can be positive or negative.  Negative is very bad. The concept can be used at every level of corporate activity, from an individual widget made in a plant, to the total output of the plant, to a mammoth division inside a multi-line company. It’s not a measure of profit; it’s the basic measure of cash generation.  The question it answers at any level is, “Does this operation generate a positive return,  before loading in charges for corporate ‘extras’ –like the CEO’s salary, R&D, image advertising, the corporate jet fleet…”

why it’s an important concept

It makes you focus on incremental cost, not total cost.  For example,

1.  It tells you the point at which a company begins to consider shutting an operation down–namely, when the contribution margin turns negative.

I was reading a report the other day about the gold industry that maintained the gold price was in the process of bottoming because the “all in” or “fully loaded” price of producing an ounce of gold for the global gold mining industry is about $1,100 an ounce.  How embarrassing for the author!  That’s not right.  Yes, at under $1,100 an ounce, a generic mine may be showing a financial reporting loss.  But it’s still generating cash–in fact, the lowest-cost mines are probably generating $500 in cash an ounce.  Only the highest cost operators will think about ceasing mining.

What will firms do instead?  They’ll cut corporate overhead, for one thing.  If they decide that the value of their plant and equipment is permanently impaired, they’ll write off part of the carrying value of this investment on their balance sheets.  That will lower ongoing depreciation charges, by. let’s say, $100 an ounce (a number I just made up).  That will magically transform the financial accounts from red ink to black.  But this change won’t alter the cash flow generation from operations.

2.  It highlights an operation’s value.  Suppose an operation has a contribution margin of $1 million a year, but all that–and more–is eaten up by corporate charges.  It can be sold to, or merged with, another operation in a similar situation.  The ” synergy” of eliminating duplicative administrative functions may turn two apparent losers into a combined money-maker.  In any event, the $1 million yearly contribution to overhead has a significant value.

3.  It invites you to look at breakeven points–and the often explosively strong effect that finally covering overhead costs can have on profits.  Hotels are the example I often thing of.  As a general rule of thumb, a hotel is breakeven on a cash flow basis at 50% occupancy.  It breaks even on a financial reporting basis at 60% occupancy.  Above that, profit flows like water into the accounts.  IN this case, a relatively modest shift in occupancy can change the profit picture dramatically–and that’s without regarding the possibility of room-rate increases.