Presidential Address - Bush Actually Wasn't That Dad

I'm as much of a Bush basher as anyone. I'm not red or blue. I'm not a liberal or a conservative. What I am is fair.

So with that spirit, Bush did a very nice job reaching out to the people in one of the darkest times, and there have been many, during his administration. Facing a situation that would really hurt all of us, he delivered a speech that explained the situation, the consequences and what the solution would do in a clear and concise manner. The fact that he didn't screw it up is an indication of how serious this is.

So hang in there America, help is on the way. I just hope it got through to everyone as it did with me.

Inside the Oracle's Eye - What does Buffett See?

Warran just invested in a financial company. Wait, I thought the world is telling us that not the play to make. Especially a company that just got it's application to become a holding bank accepted. Don't get me wrong, I'm totally with WB on this play. I scooped up BAC back at 18 and added to my AXP position at 32. As he says time and time again, "be greedy when others are fearful..." his 5 million dollar play on Goldman Sachs should make that clear to us that the bottom is upon us. To add upon that point, don't forget he just purchased Constellation Energy Group (CEG) before he bought into GS.

So with that. Let's remind ourselves that this is where people put themselves into a position to really profit from the market. Great companies at amazing prices. Money talks and Warran's money speaks even louder. It's a calming message to the markets that "hey, we are at bottom and let's keep our heads, take a look at what's going on and start making some money.

So what have I been buying and watching?

MY MAJOR PLAYS
General Electric GE - $23ish (22.16 - 42.15) 52 week high/low
American Express AXP - $31-32ish (31.68 - 63.63)
United Health Group UNH - $23ish (21.20 - 59.46)
Apple AAPL - $120ish (115.44 - 202.96)

SPECULATIVE PLAYS
Allied Irish Banks AIB - $15ish (14.22 - 53.00)
Humbodlt Wedag KHD - $18ish (18.11 - 45.74)

BUFFETT's PLAYS
Constellation Energy Group CEG - $26.5 (13.00 - 107.97)
Goldman Sachs GS - $115 (85.88 - 250.70)
American Express AXP - He recently added to his position
Wells Fargo WFC - He recently added to his position




I'll personally will be looking for an opportunity to get into GS and CEG in the next week. Assuming Mr Market provides me with an opportunity.

The Full Short Sale Ban List

Wow, the world is now banning short selling. That's crazy.

If you were wondering what stocks are on the short-sale-ban-list like I was, here is a link.

The list is up to date as of today and has the 28 NYSE stocks added to it.

-baggerJohn

The Eye of the Storm

Wow, the last few days have been incredibly exciting. For the rest of the market, it's absolute madness! Sheer madness. It's so bad it's driving straight men into each others arms. Watch the two guys in the background of the video.



For me, I haven't been this excited about the stock market in my 10 years of investing and trading. What's happening now is what every stock trading book tells you about. To paraphrase; "Be greedy when everyone is fearful and fearful when everyone is starting to get greedy." So everyone is saying that this is only the middle of the crisis, and while that may be true, there are a few things that are happening that are really encouraging me to start buying in force.

So while there are predictions that there are more disasters comings such as the fall of Citibank. Here are some reasons why I believe we are going to be ok moving forward.

1) The world is now serious about combating this. Today, the banks of the world combined together to build up 250 billion (and still growing, Canada just joined up) in money to calm financial markets.
2) Merrill Lynch, WaMu and all other distressed companies have already positioned themselves to be bought up or combined if the need were to ever arise.
3) Short Selling, which is one of the biggest contributors to this crunch, just had it's leash around it's neck tightened. In the US, you are not allowed to do any naked short selling anymore and in the UK, you're not allowed to short sell at all until next year. On top of that, the SEC is forcing all hedge funds to publish the list of all of it's shorts and frankly, that will be a big deterrent for those companies.

So with that, I implore everyone to keep their heads and just watch, soon enough things will be better.

V (VISA) part II: Finishing what I started. Lesson learned.

I screwed up a little today and I'm mad at myself for it. Being that the purpose of this blog s to track my notes and my growth, it's important that I publish my mistakes in order to keep myself accountable. I got overly emotional about a sell and short sell and the bottomline is that although I feel that I have done the due diligence in terms of research, I didn't do the last leg of the process and I didn't apply the rules of investment to my buying process.

The result was me losing an additional 100 bucks. Not a big deal and with a little dicipline, it will be made back quickly, but it's the principle that is the matter. I didn't finish the process and as a result, I got emotional and couldn't hang.

So with Visa, the opening day price was 63 and the high range is near 90. And I shorted at 68!!? Pretty stupid. Although Visa should be around 44, the reality is that I'm in the middle ground where I can lose a significant chunk or make a significant chunk. The bottomline is that I didn't have my buying rationale all thought before I made the purchase.

So let's remind ourselves what makes a good investment.
1 - after solid research (check and double check)
2 - with proper safety of investment (dammit)
3 - and with potential of an adequete return (maybe it will hit 200... maybe)

I didn't do my due diligence and I should have been more patient. The bottomline is that I would feel a lot better shorting around 85 and buying around 45. So until one of two scenarios appears, I should sit pretty on the V.

V (VISA): A Entry about punishment

This entry is about punishment. Over punishment in an overly emotional market, under punishment of certain stocks because of their honeymoon period and self punishment in the form of admitting that I didn't do enough research before making a purchase.

Today's lesson is a crucial one. I made the mistake on buying on weak research and all I got was the fluff that the pumpers have been vomiting out. Thank the good Lord that I caught myself early enough. Though Visa's stock has declined around 20% from the highs it hit after its March IPO, it has held up overall very well in the most bloody of markets.

After investing in at 73 and 68, I have finally gotten around did the real research I should have before even considering buying. Based of Visa's 10k they reported Net Income for the following years as:

2005 = $360,445,000
2006 = $454,561,000
2007 = $(1,076,095,000) LOSS

Before we freak out, the 2007 loss was due to litigation charges brought on by the American Express 2.5 Billion dollar lawsuit. Note that Visa is not done with their litigation charges as Discover just laid the 3 billion dollar lawsuit on today. FYI, part of the IPO money was set aside for future payouts. For now lets just take the litigation charges out of the equation so we can value the stock based on an ideal scenario.

To do this I took the litigation costs out of the 2007 Consolidated Statement of Operations and this gives Visa an operating income of $1,203,335,000. Assuming a 35% Income Tax (2005 had 40.18%, 2006 had 34.82%), we get a net income = $817,847,800. So that brings the 3 year view to:

2005 = $360,445,000
2006 = $454,561,000
2007 = $817,847,800 (sans litigation loss)

Divide Net Income in 2007 by 446,000,000 IPO Shares Outstanding and you get 1.834 EPS.

If we go by MasterCard P/E of 25 and your Visa per share value should be $45.85 (This is determined by multiplying the MA P/E of 25 by the adjusted EPS of 1.834). At the current price of 68ish the Visa P/E should be approximately 38ish. That is 40% higher than Master Card.

THIS IS ALL WITHOUT FACTORING IN THE LITIGATION LOSSES!!!

So although the boards (mostly idiots) say that without the charges, Visa had a Net Income increase from 06-07 of 80% (Actually, it's more like "More people will use Credit Cards. Buy now before it hits 200")... wait, I have something to say. Let's go to Google finance and pull the basic numbers and take a look at them to address the futures earnings growth of Visa.

MA (Mastercard) 248.86
Mkt Cap: 32.35B
Shares: 130.01M
52Wk High: 320.30
52Wk Low: 120.0
P/E: 25.40
F P/E: 26.46
Inst. Own: 69%

AXP (American Express) 37.02
Mkt Cap: 43B
Shares: 1.16B
52Wk High: 65.89
52Wk Low: 35.55
P/E: 11.15
F P/E: 17.67
Inst. Own: 81%

V (Visa) 68.42
Mkt Cap: 74.16B
Shares: 1.08B
52Wk High: 89.84
52Wk Low: 55.00
P/E -
F P/E -
Inst. Own: 7%

Look at the P/E and Forward P/Es of the companies... Visa doesn't have anything due to the loss but if you look at MA and AXP, the Forward P/E is higher than the Current P/E. That means that people are expecting the companies to make less than they did last year. So to say that Visa will likely keep on growing at that rate is very unlikely. AXP CEO Ken Chenault confirmed two weeks ago when he said that the business wasn't as healthy as he thought it was. Let's also not forget that the world economy is experiencing some purse tightening ergo, less transactions overall in the short term.

If you didn't already notice, I added one more statistic, Institutions that own the stock and MA is at a respectable 69% and AXP is at a whopping 81%. If Visa is really that hot, why do only 7% of the institutions own it? A better question is, what percent of the 7% of the institutions got it at the $44 dollar initial offering price.

I don't mind this stock. I bought it initially because I'm a big believer in investing in what you use. And frankly, it's comforting to know that pretty much everyone around you uses plastic, likely Visa, to do their shopping. But the bottomline is, you have to be good about your investments and according to The Intelligent Investor, an investment is a purchase made:

1) after thorough analysis
2) safety of principal investment
3) with the strong potential of adequate return

1 and 3 (3 is actually dependent on 2) are ok but frankly, I'm not so sure about the principal investment part. Every other stock out there has been punished beyond fairness but this one has not and frankly, that bothers me. The honeymoon period is wearing thin and people, myself included, have and will start sobering up about this one. I think this is a buy but not at these prices.

I'll wait for it to be properly punished first before I take a look back into it, but for now, I'm the one who has to eat it.

Good hunting.

BAC (Bank of America): I'm crazy right? Well... wrong.

Gosh there are so many idiots on the boards who don't know what they are talking about. I love how they say that Bank of America buying Countrywide in a fire sale was the worst thing they can possibly do. First off, if country wide were really in that bad of a shape, would it really be a fire sale or would it be poison? Well, Bank of America had 6 months to review it all and frankly, they sure seem eager to close it. I'd trust them over these morons any day.

The boards are calling for the firing of the CEO Ken Lewis but let's consider a few things. On October 19, 2007 Ken Lewis didn't lay it on easy about BofA's performance.

"'Two-thirds was just mistakes we made in judgment,' Mr. Lewis told analysts on a conference call. 'Clearly, we bear a lot of the blame, much more so than just market conditions.' He also promised that things would change, indicating that layoff's are imminent in the investment banking arm of BofA."

These are clearly not the words of a man without high integrity and lack of responsibility. Warren Buffett loves managers who take responsibility because he feels that once you admit to a problem, the faster you get around to fixing it. He didn't blame market conditions like many others and let's not forget who was the person responsible for BofA NOT issuing any of the option-ARM loans that are responsible for the sub-prime mess. Ya, that's right. It's Ken. He resisted the institutional imperative that got all his other CEO colleagues fired.

Ken Lewis shrewdly negotiated the rescue of Countrywide to protect the bank's interests in taking on one of bank regulators' biggest headaches in years. Let's remember that BofA said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after 
taking over the mortgage lender. Pretty much BAC has the option of firing CFC's debt into the sun (and has stated its willingness to do so). If that happens Countrywide's bondholders face the risk of default. Not the share holders. On top of all that, the CFC purchase now allows BofA to make tax write-offs over the next 20 years. They also got an incredible operation at fire sale prices (FYI, the operations unit alone is worth what they paid for it). Finally, I might add that if the Fed wasnt backing the countrywide deal maybe BofA wouldnt have done the deal. I think there are a lot of things people aren't aware of when it comes to this deal.

OK, finally for some numbers.

Bank of America is the second largest retail bank on the planet. The only one above them is Citigroup and they lost $5 billion in first quarter. The share price is currently at $14.67. In contrast, Bank of America made $1.21 billion in profit first quarter. Definitely not on pace from the last two years but in this environment, a profit is pretty darn nice.

BAC $18.70
P/E: 7.91
F P/E: 9.50 (indicates that they are expected to make less than last year, no big suprise)
Dividend: 0.64 (still super nice)
Yield: 13.65 (amazing yield, let's hope it holds)
52Wk Low: 18.44 (just hit it yesterday, did you buy?)
52Wk High: 52.96 (40-50 range has been the average price of BofA for the last 5 years - See Chart)
Mkt Cap: 83.49B
Inst. Own: 58% (It's ok, I think everyone is on the sidelines waiting to see what happens)

Also 1.715 T in assets and 1.568 T in liabilities so that leaves us at 59B (see source) after you the math and divide that by 4.45 B shares outstanding and that gives you a value of $13.26 a share. More than half of what it's priced at right now.

It'll take a year or so but at some point in the future, the financial segment will recover, and stocks like BAC will return to former prices. Banks recovered from the savings and loan crisis of the 1980's and 1990's with a lot of government help and a number of bank failures. This will be no different.

So what's low? Well, we are super close to BAC shares hitting their 2000 panic lows at $18.15. We hit $18.44 today.

The chance of BofA failing is near zero (If other banks fail, it will drive more customers to BofA). Its dividend is in the stratosphere. Ken has said there is no reason to cut it and frankly, he'll do so to signal the market that nothing is wrong. BofA going to weather this storm, turn the corner, and begin re-appreciating in price. I'm focused on the dividend, so I am not as concerned with how long that takes as I would be with a "growth" stock. In the meantime, I will happily collect my checks each quarter. When it returns to it's average operating price of 50, you would have made more than 150% off your investment. All while collecting a super nice dividend along the way.

---

I would advise everyone to read the Q1 2008 earnings call if you are looking for insight and some calm into this stock.
http://www.123jump.com/earnings-calls/Bank-of-America-Corporation-First-Quarter-Earnings-Call/27433/41




Notes:
In Portfolio: Just opened a position, will accumulate as it goes down
Duration: 5 years
Best purchase of the weekend: $7 pool hammock from Walmart

T (AT$T): The iPhone Economy

The iPhone craze has begun and I'm just eating it up. As a current gen iPhone holder, I'm sitting pretty on my current phone however I have a large number of friends, co-workers and the girlfriend jumping on board. On the way back home from work yesterday, I couldn't help myself and I took a detour to the Apple Store only to find a line about 300 people long going around the corner. It was just awesome with the fanfare, talking to random folks in the crowd as well as the people who just walked out with their brand spanking new phone. It looks way nice.

Although all the subscription pricing for the iPhone has increased, the loooong lines outside the Apple Store mean that people don't care. They want and need their iPhone. Recent earnings were positive as well so the bottomline is, there are a lot of good things going for this stock.

T has been battered along with the rest of the market. With its dividend yield, expanding wireless and TV offerings, service reliability and outstanding customer service, any downturn will be temporary. What we need not to forget is that this communications are a necessity that people cannot cut out of their lives. It's not $4 coffee and it's not a new car.

I think AT&T is one of the best values among large cap stocks. Based on the June 6th, 2008 close, the company is trading at 11 times 2009 earnings, has an estimated long term growth rate of just under 10% and pays a dividend yielding just under 5%. Don't forget that it's at a 52 week low.

Good Hunting

--------

Update 7/14/2008: Apple sold 1 million iPhone 3Gs this weekend (The orignal iPhone took 2 and a 1/2 months to sell it's first million).



Notes:
In Portfolio: Will be
Duration: Until Apple drops AT&T
Patience: Is a virtue

AXP (American Express): Don't Leave Your Portfolio Without It

To begin with, I love my AMEX card. I love the rewards, I love the customer service and I use it every chance I get.

So let's take a look at the stock. Right now it's at a five-year low and although the credit market is not looking so hot right now, all I see is a great opportunity. It is currently trading at a P/E of 12.5 and historic low average is at around 16.

Plus, this 150-year-old blue chip is wholly shareholder-friendly, distributing the majority of the capital it generates to shareholders via repurchases and dividends. Since 1994, 71% of capital generated has been returned to shareholders via repurchases and dividends. Last year, the total was an impressive 88%. That's all money back to us.

Buffet bought his 12% of the company a long time ago but I doubt he's the least bit concerned about whether AXP is going to continue to make money and grow at a blazing 12% rate. Here's the kicker, Visa lost a $1 Billion last year and the Market Cap is trading at $90B, MasterCard made a $1 Billion and it's market cap is $38.11 B. AMEX MADE $4 BILLION LAST YEAR and it's Market Cap is ONLY $49 Billion! If you can't see the value there, you're blind.

Oh did I mention their cash on hand around 20 Billion?

What's there to be fearful about with American Express? The company is a money making machine. The richest people in the world use American Express, which means a) that they spend the most money, and b) that they rarely default, AXP has the lowest default rate among credit card lenders. That's due to the fact that they only issue cards to people with good credit histories. The service is unbeatable which is why any reputable company takes them, and has all of its employess run expenses through them. AXP is a goldmine, the earnings barely slipped last quarter and if anything, they did incredibly well relative to any other bank.

The last points of interest that I dug up is that CEO Ken Chenault won't earn his options unless the company hits some impressive performance targets. The bottomline is, he has a lot of incentive to kick some major ass because he won't get bailed out. He has to earn it. Imagine how much harder pro athletes would play if they were under the same system.

When the economy recovers and cardholders dust off their wallets, AXP has a great shot at charging back to the top.

---

An additional update - June 26, 2008:

American Express will be receiving 4 billion from Visa and Mastercard over the next 3 years from anti-trust settlements. It's a year's worth of money for free. The bottomline is American Express now has some padding and protection for the next few years to help them get through the near term pain.



Notes:
In Portfolio: Of course
Duration: Forever
Lakers: We'll be back next year.

UA (Under Armour): I MUST PROTECT THIS HOUSE!!!

On one of the newsletters I subscribe to, Under Armour was recommended. Now there have been an increasing about of testosterone fortified / supplemented ads of muscle bound men screaming at the top of their lungs about how they have to protect their house that I assume they all live in... together? hmmm... OK, OK... I actually know what they are talking about (I know my sports). Which is why I was drawn to this in the first place.

So let's apply some rationale around this.

With athletic companies, you really have to treat them like technology companies operating within the athletic space. You have shoes that feature technology that cushion landings, enhance an athlete's ability to make quick movements, and even clothes that wick the sweat right off your skin so that you aren't bogged down by your own sweat. It's pretty cool what goes into athletic gear today and you can easily get geeked up over it. Technology like Nike Air and Dry Fit technology and Adidas Torsion control and throwing it way back... Reebok Hexalite and Converse React Juice and Hexalite technology all fit the bill. So what does Under Armour have... well... nothing really.

And that is what essentially bothers me. There really isn't a moat to protect it. It's a company who's only real product is their underwear product which wicks away moisture, releases heat and fits skin tight due to it's amazingly high spandex percentage. My only concern is... is it enough? They are now trying to get into other verticals including shoes and other athletic gear however, the product is second rate. So frankly, if there is a moat created by their brand, it's a moat that is very shallow and not very wide. Other companies already have the ability and technology to create a similar product.

The other side of the story is... Could this be the next And1? Like, can it do for cross training what And1 did with basketball. Essentially building a brand around subpar products and a lot of attitude? Quite possibly so.

With that being said. As Mr Buffet say, you want to be very, very selective to what you buy. Frankly, I just can't bring myself to pull the trigger on this one. Just like those manly men in the Under Armour ads say: I MUST PROTECT THIS HOUSE!!!

Investing and Not Investing on Ideas

A few weeks back, I sat down with a co-worker and we chatting about our investing principles. I gave my ideas and he shared his perspective that I thought quite interesting. He talked about investing by trends that he believe will be prevalent in the future. One example was Europe with it's expanding economy will be in a situation where people will be more wealthy and as a result, will indulge more. One consequence on that indulgence is that europe will as a country become more obese and as a result, diabetes might become more widespread. As a result, the idea is to invest in stocks that combat diabetes and encourage weight loss.

So let's take it on step further, what not to invest in. Well, gas is going crazy because of the weaker dollar (because of rate drops) and as a result, everyone is being squeezed. People will drive less, go out less and be more picky where to spend their dollars. I think restaurants, travel, gas and luxury commodity will suffer as a result. So the idea is to hold off on the Starbucks, Jamba Juices, Airline companies... you get the idea.

Interesting perspective huh?

LUV (Southwest Airlines): I'm feeling the LUV

I'm buying Southwest Airlines. It's a boring stock but you know what, maybe it's just the right time to put money into solid stocks that are super low for a nice return.

While newsletters are touting high-risk growth stocks, I see Southwest that historically ranges for 15-18 at 11.50 and to tell me that I can get 50% growth with a dividend within 12-18 and a dividend is a no brainer.



Notes:
In Portfolio: Now it is
Duration: I'm in until 17 or 18
Superbowl Pick: I had to bet on a straight up winner without the points... Pats win*

The Death of the ClickWheel = iPod Rebirth

Apple is down... waaay down. Big deal. Buy More. I am.

--------
So listening to the investor call yesterday the main thing that stood out to me besides the outlook was the growth of iPod sales. As we all know, it's much flatter today than it was in previous years and I guess we can all point to market saturation in the US for that (They say it growing really well ouside the States) . However, one thing was said yesterday that just stuck in my head (paraphrased): "We wanted to establish a new kind of iPod (Touch) in the marketplace."

A light bulb went off in my head and I realized that this is where the growth will be coming from in the future. Let's get serious, if you have a click-wheel iPod, you really don't need another. It would make you think twice about getting one. But I realized just like iPhone (I know this is obvious to all) this is a product that will evolve as time passes. Once the developer kit is released, there will hundreds of applications/games/features that people can download for their iPod touch. Pretty much it'll do waaaay more than what a clickwheel iPod does today. It pretty much does already with web browsing, youTube and email.

The competition pretty much has caught up with Apple in terms of click-wheel clone mp3 players. But they don't hold a candle to the touch in terms of applications and the fact that it will only get better as more apps are created for it by 3rd parties.

Although the click-wheel has been the heart and soul of the iPod empire, leave it to Apple to get rid of convention and come up with something better.

--------

And if you need additional reasons:

1) mac sales are soaring. We're a little above 5% but is it really
that hard to believe that it could hit 10% marketshare or even 20%?

Fun stat for everyone: Over 60% of college freshman went to school
with a mac.

2) macbook air is actually selling. I saw it yesterday at #2 but it's
at #4... behind 3 other macs on Amazon.

3) the iPhone story is still in it's infancy.

4) Apple is spreading internationally, You gotta love the weak dollar in this situation.



Notes:
In Portfolio: Just bought more!
Duration: Until Steve Jobs dies
Can't Wait: DEEEETROIT Auto Show this weekend!

NFLX (NetFlix): I want to short this badly...

Welcome to 2008. My overall thoughts just like everyone else's is that it will be a choppy year however I truly believe there will be opportunity to profit if we're smart about it. I think there will be a rise after 1st quarter earnings but anything will be erased once gas prices hit four dollars and subprime reminds us that it hasn't completely gone away.

So to bein the new year, I want to short NetFlix. My main reason is Apple is rumored to be delivering HD movie rentals to the door now. Frankly, Apple can do it. It has the infrastructure and the following in place to do it. Also, it's at an all time high with the recent upgrades. I'm sure they haven't accounted for that. If I can, I'm going to short.