Wednesday, July 16, 2008

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.


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.

Tuesday, July 15, 2008

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.

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

Saturday, July 12, 2008

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).

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