order types: market vs. limit

market order vs. limit order

The two basic types of stock transaction orders are market and limit.

market order tells your broker to execute the transaction immediately at the best available price.  Your mindset should be that being sure the trade is done is more important than the price it is accomplished at.  You might, for example, be using the proceeds from a sale to pay a bill or to buy another stock the same day.

For highly liquid stocks, an individual’s market order should have little or no impact on trading.  So a market order should get you a price at or near the quote you see on your computer screen.  Microsoft, for instance, trades over 60,000 shares a minute.  So a 100-share, or even a 1,000-share order, is just a drop in the bucket.

In my experience, the only time a market order might be a worry is in the case of an illiquid stock where your order would be a significant portion of the day’s trading volume.  If so, a market order could get ugly.  When I ran a small institutional trading operation for a number of years, I thought that I could be no more than a quarter of daily trading volume.  Big institutions figure they can be no more than 10% without making a visible impact on prices.

 

limit order specifies a price that is the maximum you will pay to purchase or the minimum you will accept for a sale.  The broker is required to transact at the limit price if the opportunity presents itself.  He is permitted to transact for you at a more favorable price than the limit, but is not allowed to transact at a less favorable one.  So the trade may not get done on a given day.  Depending on your instructions, your unfilled order will either be cancelled at the end of the day or carried over to the next trading day.

Typically a limit is set at a better price than the current market.  I may enter a limit order, for example, to buy a stock at $68 when it’s trading at $70.

But a limit can also be set at a worse price for me than the current market and used as a quasi-market order.   If I want to buy a less-liquid stock, for example, I can enter a limit order at $70.50 when it’s now trading at $70.

 

Personally, I use limit orders a lot.  When I’m buying I will typically buy a third of my intended position at the market and set a limit at, say, 5% below the market for the second third.  If the stock hits that limit, I’ll set a lower limit for the final third.

I’ll scale up in a similar fashion when I’m selling.

 

Stops tomorrow.

 

 

placing a trade: the basics

There’s some jargon involved in placing an order to buy or sell a stock, but the process is relatively simple.  I’m going to proceed as if the order were being placed online, but you’d give identical instructions to your broker over the phone or in person.

An order consists of:

the basics

–the name, or ticker symbol, of the stock you want to transact in

–whether you want to buy or sell

variables

–the number of shares you want to transact

–how long the order will be in force

–the type of order

–in the case of a sale, whether or not you want to specify the shares that will be sold.

 

specifying shares

This applies only to taxable accounts.

I believe that the merits of the stock should govern the buy or sell decision.  My experience is that when the main reason an investor doesn’t sell is to avoid paying a capital gains tax,  trouble invariably follows.

But there may be situations, however, like in trimming a position that has gotten too large, where it’s important to choose the best tax lots to dispose of.  The general rule I’ve followed is to recognize the largest loss or smallest gain.  But your own tax situation will dictate what you should do.

If you don’t select lots, the profit/loss your broker reports to the IRS will be based on the average cost of your entire position.

 

how long

The two basic duration indications are:

–day, meaning the order is good only until the end of the trading day on which you place the order (your broker may also have provisions for extending the trade into after-hours trading), or

–good ’til cancelled (GTC), meaning that, if unfilled, the order will stay valid until you cancel it.  Despite the name, your broker may require you to periodically revalidate the order.  GTC is normally only important with limit orders.  Unless you’re dealing with a highly illiquid stock, or in gigantic amounts relative to daily trading volume, market orders are usually executed pretty quickly.

There are several other types of order, none of which I’ve ever used:

–fill or kill, meaning the broker will buy as much of the order as he can immediately and cancel the remainder

–immediate or cancel, meaning the broker will cancel the order if he can’t fill all of it immediately

–on the open, meaning the first trade of the day

–on the close, meaning the last trade of the day.

 

Limits and stops tomorrow.

 

 

 

 

 

Disney(DIS)/ESPN: from growth to value

the maturing of ESPN

In the 2016 DIS fiscal year (ended in October), earnings from the Media Networks segment, which is basically ESPN, decelerated from its fiscal 2015 +6% pace to a slight year-on-year decline.

Two problems:  increasing costs for sports rights; and “cord cutting,” that is, consumer reluctance to pay increasing fees for cable service and cancelling instead.

Part of the issue is the proliferation of new sports content generated by individual teams.

Part is the high cost of ESPN programming to consumers:  SNL Kagan estimates that by the year after next, ESPN will be charging $9.17 per cable subscriber for its services, up from what I think is around $8 now.

Part is also ESPN’s preferred position in the basic packages offered by cable companies.  I’ve read analyses, which I’m not sure are correct, that maintain that although all cable subscribers pay for ESPN, at few as 20% actually use the service regularly.  If so, $100 per year per subscriber translates into $500 per year per user.

In addition, as a sports fan I’m offended by the faux debates and shouting matches that ESPN has begun in an attempt to woo viewers.  Covering WWE as if it were a real sport   …Really?

the move from growth to value

It seems pretty clear to me that ESPN is no longer a growth business.  Gathering realization of this by investors is the reason, I think, that DIS has underperformed the S&P over the past two years by about 25%–despite its movie and theme park success.

The important question for investors is how much deceleration at ESPN is factored into today’s DIS quote.  Is the worst that can happen already priced in?

worst case

I think I understand the worst-case scenario.  It’s that pricing for ESPN ultimately shifts from per subscriber to per user.  This most likely means a substantial decrease in ESPN revenues.  The big question is how much “substantial” is.  If it’s correct that only one in five cable subscribers actually uses ESPN, then revenues could be cut in half by the change, even if users are willing to pay double what they are laying out today.

That outcome may be extreme, but it’s certainly not priced into DIS stock, in my view.

I’m not sure what the right calculation is.  However, while the outcome of this important issue is so up in the air, I find it hard to imagine DIS outperforming.

 

 

 

Disney (DIS) and ESPN: a lesson in analyzing conglomerates

DIS shares went on a fabulous run after the company acquired Marvel in late 2009, moving from $26 a share to $120 in early 2015.  Since then, however, the stock has been moving sideways to down–despite rising, consensus estimate-beating earnings reports in a stock market that has generally been rising.

What’s going on?

The basic thing to understand about analyzing a conglomerate like DIS is that aggregate earnings and earnings growth matter far less than evaluating each business in the conglomerate by itself and assembling a sum of the parts valuation, including synergies, of course.

In the case of DIS, the company consists of ESPN + television; theme parks; movies; merchandising related mostly to parks and movies; and odds and ends–which analysts typically ignore.

In late 2009, something like 2/3 of the company’s overall earnings and, in my view, 80%+ of the DIS market value came from ESPN.

How so?

At that time, ex Pixar, the movie business was hit and miss; the theme parks, always very sensitive to the business cycle, were at their lows; because of this, merchandise sales were similarly in the doldrums.  ESPN, on the other hand, was a secular growth business, with expanding reach in the global sports world and, consequently, dependably expanding profits.

ESPN profits not only made up the majority of the DIS conglomerate’s earnings, the market also awarded those profits the highest PE multiple among the DIS businesses.

At the time, I thought that if truth in labeling were an issue, the company should rename itself ESPN–although that would probably have detracted from the value of the remaining, Disney-branded, business lines.

Then 2012 rolled around.

More tomorrow.

 

continuing apparel retailing woes

I haven’t been watching publicly traded apparel retailers carefully for years.  For me, the issues/problems in picking winners in this area have been legion.  There’s the generational shift in spending power from Baby Boomers to Millennials, the move from bricks-and-mortar to online, the lingering effects of recession on spending power and spending habits.  And then, of course, there’s the normal movement of retailers in and out of fashion.

I’m not saying that retail isn’t worth following.  I just find it too hard to find solid ground to build an investment thesis on.  Maybe the pace of change is too rapid for me.  Maybe I don’t have a good enough feel for how Millennials regard apparel–or whether retiring Boomers are using their accumulated inventories of fashion clothing rather than adding to them.

Having said that, I’m still surprised–shocked, actually–at how the current quarter for apparel retailers is playing out.  It seems like every day a new retailer is reporting quarterly earnings that fall below management guidance, usually the latest in a string of sub-par quarters.  That itself isn’t so unusual.

But the stocks react by plummeting.

You’d think that the market would have caught on that Retailland is facing structural headwinds.  Or at least, that the retail area that made the careers of so many active managers over the past twenty or thirty years doesn’t exist any more.

 

Is it robot traders?  Is it an effect of continuing buying by index funds?  I don’t know.  But the continuing inability of investors to factor into stock prices the continuing slump of apparel retailers is certainly odd.

Warren Buffett and Amazon (AMZN)

I read a recent comment Warren Buffett made expressing his regret at never having bought AMZN.

As far as I can see–and I’ve never met Mr. Buffett–he’s an urbane, sophisticated, complex individual who chooses a down-home persona to market himself to the world.  I don’t regard anything he says that involves the stock market as being a stray, off-the-cuff remark.  I wonder what he meant.

the top ten

As of March 31st, Berkshire Hathaway’s top ten holdings are, in order:

Kraft Heinz

Wells Fargo

Apple

Coca Cola

American Express

IBM (adjusted down for Buffett’s announced intention to pare his holding by 30%)

Phillips 66

US Bancorp

Charter Communications

Moody’s.

Source:  CNBC (a format that allows easy sorting of the SEC data)

The list comprises 80% of Berkshire’s equities.

 

Yes, despite Buffett’s well-advertised aversion to tech, there are two IT names in the top ten.  But IBM is cutting edge tech circa 1975 and AAPL is a high-end smartphone company looking for a new world to conquer.

the Buffett approach

All these firms do have the signature Buffett look:  they have all spent tons of money developing important consumer-facing brand names.  While that spending has created an enduring consumer franchise, there is no hint of the existence of this key asset on the balance sheet.  Rather, the all-important brand-building expenditure is accounted for as a subtraction from asset value.

The one possible exception to this is Charter, whose cable networks rather than sterling service and extensive advertising give it near-monopoly access to customers.  Here again, however, the ability to gradually write off the cost of constructing those networks through depreciation argues that the balance sheet severely understates their true worth.

The formula, in brief:  the “hidden” value of extensive well-staffed distribution networks plus iconic brands built through extensive spending on advertising and promotion.

limitations

The obvious limitations of this approach are:  that while novel in the 1950s, the whole world has since adopted Buffett’s once-pioneering approach; this would be great if there were no internet undermining the value of traditional brand names and distribution networks.

In other words, a software-driven, internet-based firm like AMZN seems to me to be the last thing that would ever be on the Buffett radar.  It also seems to me that taking AMZN seriously would mean rethinking the the whole Buffett investment approach–not the valuation discipline, but the idea of the value of traditional intangibles–and recasting it in a much techier way.

why not adapt?

Why not do so anyway, instead of kind of limping to the finish line?

Maybe it’s because that doing so would attack the heart of the intangible brand value of Berkshire Hathaway itself–and that attack would come not just from a nobody but from the brand’s most credible spokesperson, the Sage of Omaha himself.