Performance That's "Beyond Ludicrous"
July 31, 2007
I'm fortunate to have amassed a circle of readers that are passionate about my books. They offer me tips on improving them, suggest topics for further study, and tell others about them. An author can't ask for more from his readers.
Sometimes, though, they protect me too much. My stock book is highly rated at Amazon.com, but not everybody rating it approves. When Nicholas E. Johansen awarded it a mere three stars and supplied some unflattering comments, readers reported the transgression to me within hours. One went so far as to suggest that I prove to Amazon that some of Mr. Johansen's comments are not true and demand that they be pulled. I will not do that.
Instead, I'll address some of what he wrote, focusing mostly on his skepticism around my permanent portfolios.
Mr. Johansen begins his review with a much-appreciated summation of what he considers to be good about The Neatest Little Guide to Stock Market Investing:Kelly does an excellent job of defining various stock terms -- everything from P/E ratio to beta -- and doing it in simple language. As a side note, his writing style and prose is significantly better than that featured in most investing books, since he was an English major. Additionally, Kelly provides excellent research resources, including ones that I had not found in my extensive internet searches. More information and more sources is never a bad thing, and Kelly provides the latter in spades. Finally, his introduction to such investment greats as Warren Buffett and Peter Lynch -- while rudimentary -- are very helpful for the new investor. I find it particularly good that he utilizes Lynch extensively in his own strategy, because Lynch is (arguably) the best fund manager that has ever lived. Lest you become too comfortable in this warm light, however, know that the English major benefits won't outweigh the detriments to this reviewer before he's done. He quickly moves on to the problems he sees:Unfortunately, Mr. Kelly adds a bit of his own intuition and thoughts into the strategies he presents in this book. First and foremost, his notion that investing in the UltraDow mutual fund is sound is beyond ludicrous. Not only is this an ineffective use of money, but its volatility and risk far outweigh its gains. Ah yes, the oldest objection in the book against my doubling strategies: they're volatile.
Folks, here's a tip for you: whenever an investment strategy has the word "double" in the title, it's going to be volatile. When you double the performance of an underlying investment in both directions, you're going to experience -- by definition -- twice the volatility of the underlying investment. What I show in the book is that doubling groups of reliable stocks such as the Dow and, in my new edition, the S&P MidCap 400 index, is that they have always recovered in the past and that down moments in the market provide a wonderful chance to put more money to work at a discount.
I hammer this idea home regularly in The Kelly Letter. Commit it to memory: extreme volatility coupled with assured recovery is a potent combination.
You would not want to double the performance of a single stock because there's a chance that the stock will decline so precipitously that you'll lose all of your capital. That's not the case with my doubling strategies because they target major indexes. In fact, I show that even if an investor began my Maximum Midcap strategy at the worst possible moment, its peak before plummeting, he or she would have been back at even within five years.
That's comparing only the initial investment with no additional money added along the way. If, however, an investor was astute enough to buy more shares during the down times, as advised in The Kelly Letter, the margin of outperformance by Maximum Midcap was far larger. From its low in March 2003 to the end of 2006, the strategy returned 272%.
This is no small feat. The dot.com crash of 2000 to 2002 was the worst bear market of my career so far, and likely the worst of my lifetime. The Nasdaq plunged 78%, after all. It doesn't get much worse than that.
Yet, even investing in this strategy at the worst possible moment of one of the worst bear markets of our lifetimes did not produce financial ruin. In fact, the intelligent investor who followed my advice to keep investing during the worst months was back to even within a couple of years and is now counting substantial gains.
Even right now, we're seeing the volatility in action. The Kelly Letter invests more money in each of my doubling strategies at the end of each month. That happens to be today. You know what happened last week? The market sold off and my Maximum Midcap strategy, true to form, fell twice as much as its index. It dropped 12% in a week.
Sounds terrible, right? However, if you look at the long history of the index itself you'll understand that such downdrafts are just part of the pattern. When the index turns up again as it always has, shares bought at the 12% discount will roar back with twice the vigor of the market itself. That's the beauty of this approach.
Subscribers received a reminder email last night to buy more shares today. You can see how they've fared over the years we've been using this strategy here.
If that's "beyond ludicrous," join me in the crazy camp. There is no evidence that these doubling strategies entail volatility and risk that far outweigh their gains, as Mr. Johansen claims.
He then attacks what he perceives to be my lack of professional training:In the preface, he states that using this book "always works" -- a pretty bold statement from someone who is A) not a business major and B) not really even a market professional. Only later, towards the very end of the book, does Kelly admit that he has "limited experience" in the area of stocks. Er...what was this about "this book always works"? Kelly's strategy is, in essence, based upon filling out a worksheet and setting arbitrary numbers as "good" or "bad" -- i.e. when X ratio outweighs Y number, this stock is a good buy. Get enough of these "good buy" signs together, and you have a stock to buy. Not only does this show his lack of knowledge on the subject, but worse, he makes these statements as if they are guaranteed to make you money. This part is just plain untrue. Nowhere in my book does the phrase "limited experience" even appear.
As for my worksheets, what stock worksheets do you know that don't compare numbers and ratios to benchmarks and competition to see how they stack up? I'm not sure why Mr. Johansen considers that to be a bad approach. I never imply to readers that getting enough good measurements together automatically produces "a stock to buy." In fact, here's an excerpt from page 24 of the book pointing out the uncertain nature of stock analysis:The annoying thing about stock measurements is that even if every one of them gives a green light to a stock you're considering, it might still end up being a bad investment. It's not like measuring your inseam. Once you know that number, you know the length of pants to buy and if they're that length, they fit. Period. It's not that simple with stocks. I've been wrong on stocks. So has everybody who's ever worked in this business. It's part of the business. What I tried to do in my book is give the reader an edge over the odds by showing certain measurements that have worked and are better than nothing when it comes to understanding a company.
With no measurements, we might as well throw darts or roll dice. We need measurements to determine what a company is worth, compare what it's worth to its current price in the market, and determine if we have a chance to buy it at a discount and benefit when the market awards it the value that it's worth.
As for my having studied English instead of business, guilty as charged. I don't consider that to be a weakness and, apparently, neither do others in this business. I interviewed Bill Miller in May for subscribers. He's famous for having beaten the S&P 500 for 15 years in a row from 1990 to 2005 at the helm of Legg Mason Value Trust. Know what he studied in college? Philosophy.
Next, Mr. Johansen has a few choice words for beginning investors:Interestingly enough, Kelly almost always talks about buying shares in the HUNDREDS. That's right, as in 200 shares of Microsoft. Almost anyone who knows something about the market will tell you that investing $5,000 or even $10,000 will yield underwhelming results. The # of shares Kelly is dealing with proves to show that he is not only small time (re: has not made a lot of money off trading) but probably hasn't been at investing for very long. Clearly, Mr. Johansen was not an English major. The first thing writers learn is to know their audience. My book is for beginners. I deliberately designed my examples to be near the amount of money that my readers are likely to be managing when they first approach the market.
Besides, what works for $10k works just as well for $100k. It's like swimming. You learn to do it in water that's shallow enough to allow standing when you make a mistake. What you learn in that shallow pool, however, will get you through the deepest waters later.
And, if any reader doubts my own authority on the subject, just look at whose advice appears in my book: Benjamin Graham, Philip Fisher, Warren Buffett, Peter Lynch, William O'Neil, and Bill Miller with historical perspective provided by James O'Shaughnessy and cameo appearances by Susan Byrne and Charlie Michaels. This is an all-star roster and maybe, just maybe, combining their wisdom as top performers in the investment business with the writing skills of a lowly English major is precisely what a beginner needs to take those first few steps.
Not just beginners, either. You don't get higher in the world of investing than the people whose advice I capture in my book. Any investor will benefit from distillations of their advice. About my summary of his techniques, Bill Miller wrote, "Jason Kelly captured my investment methods well, and better than most who have tried to describe what I do."
I appreciate Mr. Johansen's taking the time to write a review of my book. I also appreciate the many kind readers who worried about my well-being. Rest assured, I've withstood more vicious attacks on my strategies and more scathing indictments of my education.
None of it matters as much as the facts. My book does always work. I track everything in it on this site and in my weekly advice to subscribers. There are fewer and fewer critics of my methods as the years go by. Why? Because my strategies are beating almost everybody.
Even Bill Miller, much as I respect and admire him, is behind my Maximum Midcap strategy through the dot.com crash to now. Of course, his performance was far less volatile and that's a different kind of victory. What I'm proud to show is that my strategies are some of the best ever explained to beginning investors, the overwhelming majority of whom invest more money each month or quarter to achieve their goals.
That approach, known as dollar-cost averaging, has no better friend than my volatile but skyward reaching strategies, Double The Dow and Maximum Midcap. Just as The Kelly Letter is doing today, Tuesday, July 31, buying more when the price is down and waiting for the eventual turbo-charged recovery has proven to be a winning approach to the market.
I hope you're not too disappointed that it was brought to you by an English major.
Tomorrow: A response to my Power Investor article from the software's publisher, The Investors Alliance.Labels: Perma Ports
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Online Ad Pros Discuss Google
July 30, 2007
My article last Friday, Google vs. Microsoft, was picked up by Seeking Alpha and started a discussion between two members of that site who are online advertising professionals. I'll respond to their comments here.
Jeff Molander of Molander & Associates wrote that he thinks Google is attempting to clean up its AdSense network, most notably with a "Pay-per-action scheme and kicking out the made-for- AdSense crowd."
This would be a welcome development for all web searchers. Pay-per-click is easily abused because Google gets paid for a click whether it benefits the advertiser or not. Pay-per-click was seen as a major advantage over pay-per-impression because it showed the advertiser that they didn't pay unless they got results.
However, advertisers like Ron Davis (whom I quoted last Tuesday) and me noticed long ago that even clicks from Google ads don't necessarily work, and get expensive quickly. A click, it turns out, isn't much of a result. There are no figures available for how many clicks are from genuinely interested parties and how many are from people clicking ads on their own site to get money, competitors clicking ads to use up a rival's budget, and other forms of click fraud.
So, a pay-per-result or pay-per-action model would go a long way toward making advertisers happy again. If you're selling a $50 item, for instance, and your profit margin is $25, you have a lot of money available for bidding on the result of actually selling it. As it stands now, you have to watch carefully the percentage of clickers that buy it, figure the highest amount you can pay to afford all the deadweight clickers that come with every buying clicker, and then budget accordingly. The result is an ad plan that gets so slimmed down from the crummy performance of Google's text ads these days that it's just not worth it for many people.
I hope Google's clean-up efforts continue, and that the rest of the industry follows along. In the meantime, though, the deterioration of Google's model spells trouble for the only way the company makes money, and is what may give us a cheaper stock price.
Derrick Shields of Adscape wrote that he doesn't "think it was GOOG's intention to 'trick' users into clicking on contextual, text-based advertisements."
Maybe not, but it's become clear over the years that a lot of the early success of the text ad came from the way it blends into a page and looks like part of the page itself. People clicked away at anything on the page, not being careful to see that it was an "Ad by Google" that they were clicking. Now, that low hanging fruit is gone. People know where the text ads are placed in search results, know where to find the "real" results versus the paid, know how to spot a text ad block from a mile away on a third-party website, and so on.
Derrick wrote, "What you are saying is akin to saying that television commercials are no good because consumers are aware that the brands/advertisers paid to have their commercial shown."
This is an interesting example. It doesn't matter whether we all know that a commercial is a paid spot or not, what matters is whether we want to watch it. Evidently, the answer is a resounding "no." Whenever possible, people strip commercials from their favorite programs. All of us have seen a commercial that we liked at one time or another, but we still resent the interruption to our activity that advertising imposes.
It doesn't take a professional study to realize this. Let's say every TV program was preceded by a screen that asked, "Would you like ads interspersed throughout the programming or would you like the program to be ad-free?" Do you think the larger percentage of people would select the no-ad version or the ad version? The no-ad, of course, even though there will probably be some relevant, interesting ads in the mix that they'll miss.
It's the same online. If every website was preceded by those same two choices, almost everybody would elect to see the no-ad page, even if the stripped ads were text-based and relevant.
By the way, this is exactly why you're seeing more in-program advertising. Rather than running another 30-second Coke spot, Coca-Cola will pay to have the character in a sit-com drink a can of Coke and maybe even say, "I love this stuff!"
People don't resent advertising, per se, they just hate when it gets in the way of what they're doing. Ads hog page space. They creep into all the little areas that our eyes want to be clean. They create a sense of stress in the viewer because an abundance of links on a page makes it harder to focus on what to do next, what to read, where to go.
Google is an advertising business and has offered other ways to incorporate ads into smaller and smaller places on a page as the click rates for the bigger ad blocks dropped. Site owners can now put link bars into thin areas and they show just the category of ads that will appear.
There's nothing wrong with Google trying to get more people to click and perhaps even hoping that those clicks turn into business for advertisers. The problem is that they don't. Word is getting out. Something new is needed and soon, or Google's only source of revenue is in trouble.
Nobody in this discussion is naive. We know that advertising won't disappear, shouldn't disappear, but in the same way Google changed the face of online advertising with its text model, something is going to displace the text model in the near future. It's not clear yet whether Google will be the company that develops the next method of online advertising. So far, it hasn't shown much creativity. Other firms, including Microsoft, appear to be ahead.
Derrick wrote, "I think it's wrong to assume that the text-ads are irrelevant or not useful to the user. Let's say you did a search for 'cheap online brokerages.' Of course the top 10 organic results would be (hopefully) relevant but I think it would be fair to assume that the paid advertisements would be very relevant as well."
It would not be fair to assume that at all, and this is precisely my point. I searched Google for "cheap online brokerages" and found the organic results to be useful: a SmartMoney article on the best brokers, a CNN broker guide, and links to some brokers themselves.
The ads, however, disappointed. The horizontal ad on top was for Firstrade, relevant, clear, and fine. The vertical ads to the right of the results, on the other hand, were representative of the problem. The top one was just a collection of links assembled by Active Audience, a domain parking outfit. The next one was another collection of links by a similar outfit. Clicking either was a waste of the user's time because the result was not a broker at all, but a list of links inferior to the list that was already served up by the search engine.
That's why people stick with the organic results.
Derrick points out in a later comment that Google clearly differentiates its ads from its organic results. I agree. Everybody knows where the ads are, almost everybody avoids them, and there's good reason for them to do so.
The point of my article was that GOOG the stock looks vulnerable to revenue trouble from the declining performance of Google the company's ads. I still think that's true.Labels: GOOG
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Google vs. Microsoft
July 27, 2007
I wrote Tuesday about trouble with Google's AdWords platform. I noted that it's not performing as well as it used to, and that that will spell short-term trouble for the company and stock because 99% of Google's revenue comes from its ads.
On Wednesday, Digg switched from partnering with Google to provide ads on its reader-powered news site, to partnering with Microsoft. Digg will still display small text ads, just like the ones previously delivered by Google, but now they'll come from Microsoft and are expected to be better.
How could this be? Google is supposed to be the cutting edge of all things Internet, yet it's grown relatively stodgy in the ad business, which is its only revenue-generating endeavor. Everything else it does is just to gather people around pages that show content and...ads. If it blows it in the ad game, it's in real trouble because that its only game.
Meanwhile, old crusty Microsoft is leading the charge in the ad category. Jay Adelson, Digg's CEO, said his company couldn't "think of a better partner to get to where we need to go. They're a young ad service, they're innovative, they're willing to work with us on the cutting edge."
Last summer, Microsoft signed up the social networking site Facebook. Now it has Digg. It's in the process of acquiring aQuantive to keep its adCenter division at, well, the center of advertising.
Rather than Google's plain-Jane pasted-on-the-page ad system, Microsoft is developing a more interactive approach. Users have been screwed by too many worthless text ads that have, in fact, little to do with what they're doing online. The context sensitive approach was nice five years ago, but has been worked to death to the point where fewer and fewer people bother looking at anything but organic search results (the ones that the web turns up by actually searching, not the ones that are placed as ads). Everybody's onto the text ad trick by now.
Steve Berkowitz, a senior vice president in Microsoft's online services group, says Microsoft is the innovator, not the copy-cat, in online advertising. "We actually now are in the forefront of what we believe is going to be the next generation of advertising."
True, Microsoft has a long way to go to catch up with Google, but it certainly doesn't lack the money to get there.
I've written for some time now that my interest in Google has to do with its endeavors to make Microsoft alternatives. I want to use Google Docs instead of Microsoft Office, for instance, and I'd like to see an entirely free operating system made available and amazing, just as Mozilla has made the entirely free Firefox the best thing in browsing. Try using Internet Explorer after Firefox and you can scarcely believe anybody's stupid enough to keep it.
Is Microsoft taking Google's encroachment onto its core turf in stride? No. The Redmond giant is well aware that its main business is threatened by web-based applications, online advertising, and other ventures.
Last night, Microsoft CEO Steve Ballmer told analysts that web services and consumer devices are vital parts of the company's future. He said, "Great things don't happen overnight. Most successes require long-term investment and innovation...and that's our perspective."
He said he sees more opportunities for growth in the next 10 years than in the past 30 years. Rather than hiding from new, disruptive technologies, Microsoft will embrace them. He referred specifically to the threat of web-based software versus Microsoft's traditional local hard-drive-based software.
"Every piece of software -- the basic core value in the way software gets created -- will change in the next three, five or 10 years," he said, and predicted that all software will soon use the desktop, Internet, and server to get its job done. He said that software will never switch to an Internet-only model.
What's going on here?
Google is an online advertising company that has plans to become a software company. Microsoft is a software company that has plans to become an online advertising company. They're both much better than the other in their current area of strength at the moment, but they're both looking a little uninteresting in that area as the other catches up in exciting ways. They both have a lot of money to get where they want to be.
Microsoft shares were stuck between $22 and $30 from mid-2002 to mid-2006. From early June of last year to now, the shares are up some 36%, but that's just the difference from $22 to $30, so the situation hasn't changed all that much. Pay no attention to what excited onlookers say about the percentage gain.
Google shares are the toast of the town, having gone up 400% from $100 to $500 in the past five years. However, there've been bumps along the way. From January 2006 to mid-March 2006, GOOG dropped 28%. Could we be on the verge of another such sale?
I think so. It reported earlier this month that it hired 1,500 new people. It now has 14,000 people on its payroll to support all of its new endeavors, not one of which makes money beyond providing pages for ads. It's little surprise, then, that Google's operating margin has fallen from 35% two years ago to less than 29% now, and it's still falling.
I'd steer clear of GOOG shares for a while. Keep using all of its amazing services, keep loving the pressure it's putting on Microsoft to innovate, keep hoping that it announces one day an entirely free operating system, but let the sale around its shares continue.
This Weekend To Subscribers: How our watch list is getting closer to our target buy prices in this falling market, the profit potential of Japan, whether this is the right time to start a permanent portfolio at sale prices, and a look at the stock we purchased on Tuesday for a price much lower than what Morningstar suggested for this 5-Star stock.
Coming Soon On This Free Site: Good investment resources versus ones that just generate noise, Panera Bread versus Starbucks, Blockbuster versus Netflix, what's wrong with U.S. health care, and more.
Disclosure: The Kelly Letter portfolio includes Microsoft, currently up 33% for us.Labels: GOOG, MSFT
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Unshort Apple
July 26, 2007
A few weeks ago, I spent time looking at Apple following the release of the new iPhone. I wrote that I thought expectations around the phone were too high, that it would disappoint, and that we might have a chance to short AAPL stock ahead of such disappointment. I made it clear that I was watching the stock as a potential short.
Then, in my July 13 article, Dave Van Knapp reinforced the notion that it was not yet time to short AAPL when he wrote, "It's going up and has been going up for about a year. Many people believe it is overvalued already, and has been for some time, but the fact is that it's been going up anyway."
Dave and I looked pretty smart until rumors of slow iPhone hook-ups at AT&T sent AAPL down 6% on Tuesday. "Still watching?" asked one reader. "You may have missed your chance."
It sure looked that way. In the first two days it was for sale, the iPhone sold just 270,000 phones. As predicted here, that was fewer than several analysts had expected. When rumors of slow hook-ups at AT&T became reported fact that only 146,000 units were humming on the network, observers far and wide heard the sound of a ship's horn departing the dock. The time to short AAPL, many speculated, was already behind us.
However, my decision to watch rather than short immediately, and Dave's observation that there's clear momentum behind AAPL, looked good after hours last night when Apple reported results for fiscal year Q3.
Apple is on fire!
You don't want to be short ahead of this kind of report:- Its profit margin came in higher than expected, at 19.2%.
- iPod sales rose 21% from a year prior.
- Macintosh computer sales rose 33% from a year prior to 150,000 units -- the most ever sold in a single quarter.
- Sales in the 185 Apple Stores rose 33% from a year prior to $915 million.
- The company will open 12 new stores this fall to end the year with 197.
- The company still expects to sell 10 million iPhones next year.
Pre-open this morning, AAPL shares are up some 8% and look set to break through $150 today, which would be a year-to-date gain of 77% and a 12-month gain of 135%.
The last few weeks have been a great time to not be short AAPL. Let the watching and waiting continue.Labels: AAPL
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Trouble For Google AdWords
July 24, 2007
On July 16, I complained about AdWords, Google's advertising platform, and cited decreasing return on internet advertising as a short-term weakness for Google. I pointed out that eBay didn't suffer during the week that it pulled its ads from Google, and related my own experiences with Google AdWords. I wrote, "I'll keep watching Google for a better entry price."
Well, we got it. Since that article, GOOG has fallen more than 7% as of yesterday's close at $512.51. I continue to think that the Google competitor we own in The Kelly Letter has more potential for appreciation because it's:
> Beaten down
> Well-positioned for changing advertising trends
> Benefiting from new management
> Not expected to do well, thus primed to pleasantly surprise
Since my article, others wrote in with their own AdWords experiences, and not one of them was positive. Most people contacting me asked that I not reveal the details of their stories for fear of having competitors take their keywords, start rival sites, and such. Unfortunately, without the details, most of the stories lost their impact.
However, Ron Davis agreed to let me reprint his story:I specialize in training seminars for companies that want to implement business intelligence solutions using Microsoft technologies such as Sharepoint and BizTalk. That is what I was advertising on Google AdWords. Most of my traditional business comes through brokers who scout companies for needs like these. If I eliminate the brokers, [I keep more profit].
I used all of the key words that match business intelligence searches and had zero results over a 90-day trial period. I know companies do these types of searches yet I had no success and was lost as to the why until I read your stats on the organic searches. I'm afraid the text ad gig is at a major inflection point.
Google's text ad business was brilliantly conceived and implemented. The reason its text ads destroyed banner ads is that they were unobtrusive, new, and looked like informational links. When you searched five years ago, the ads often provided the best information on the results page because they hadn't been hijacked by the spam gang yet.
Now, all that's changed. The proliferation of Google ads across the Internet, including on my own sites, has taught people that they are ads, not additional useful information. Just as banners lost their appeal, so have text ads. The click rates are dropping, as the studies I cited a few weeks ago show, and as my own experiences and the experiences shared by my readers reflect.
So, advertisers get fewer results. Oddly, they end up paying more for them because the cost per click -- when the clicks come -- is now too high.
Ads are no longer dominated by genuine sellers of services that might be of interest to people searching on certain keywords. I was an early adopter of Google's keyword text advertising, and it worked for a while. Using PayPal and Google ads, I sold a book I'd written on how to pay for long-term health care.
In less than a year, that business went from very profitable to barely breaking even to losing money solely on the increasing price I needed to pay per click. I paid more money to achieve fewer sales, and both trends continued to the point of making the campaign damaging to my bottom line rather than beneficial. My ads were copied and outbid by others, and I suffered from false clicks by competitors attempting to drive up my costs so much that it was no longer profitable for me to advertise.
It worked. I no longer advertise on Google, or anywhere else for that matter. Prices are so high on Google and the results are so low, that only major companies are using the service much anymore. The small businesses that made the text ads so appealing in their early incarnation, are gone. The usual gang that dominates advertising, and the spam gang that dominates online activity, have taken over.
When was the last time you clicked a text ad to your satisfaction? I can't even remember, because I stopped clicking them ages ago. I can tell from the decreasing revenues from Google's ads on my sites that others are clicking less, too.
Look to the left of this paragraph. See that ad block? Go ahead and try clicking some of the ads in it, and see if you go anywhere that has even the slightest chance of getting some business out of you. Probably not, yet that ad block is supposed to serve relevant ads that help you, the potential buyer, and the sellers who are paying for your clicks. They used to do just that. These days, they don't.
Lower income for me means lower income for Google, assuming that the accounting is done properly. I'm just one small example in Google's vast client roster, but not meaningless. If people are clicking less on the context-sensitive ads on my sites, perhaps they're clicking less elsewhere, too.
Indeed, that's what studies show and that's what readers report.
Coming Soon: More free online stock screeners recommended by readers, swing trading versus buying and holding, and the accusation that my permanent portfolio strategies are "beyond ludicrous."Labels: GOOG
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Power Investor
July 23, 2007
In the first two editions of my stock book, I recommended Power Investor software. I also linked to it from various places on this site. The $99 price for such comprehensive research software was a bargain, in my view, and supported much of my stock research for years.
Not anymore.
Starting a few years ago, I began receiving complaints from readers who followed my advice to buy the software. The data set was old or incomplete. The calls to customer service weren't answered. Emails went unreturned. Finally, the organization behind Power Investor looks to be folding, because the latest is that it's no longer accepting new subscribers.
More than any of that, though, the reason I stopped recommending the software in the third edition of my stock book, due out later this year, is that it's no longer necessary to pay for stock research databases. There are excellent, free ones available online that have become good enough to rival the paid versions. They are the ones I profile in the new edition of my stock book.
For my many readers coming here each day, however, the new information can't wait. Below, free of charge, is the entire Stock Screeners section from the third edition of The Neatest Little Guide to Stock Market Investing:Stock ScreenersSince the earlier editions of this book, it's become easier and cheaper to find good stocks. As recently as a few years ago, stock databases came on CDs. You had to install the programs, then get data updates by downloading files from websites or receiving new CDs every month. The programs were expensive, too. Some cost more than $500 per year.
Free online stock screeners have changed the rules. Pros used to scoff at pared-down tools from places like Yahoo! Finance, and some still do. The thing is, free tools are no longer pared down. They do everything an individual investor needs them to do. Much as I've looked -- and I've looked a lot -- I can't see any compelling reason to pay for stock software anymore.
All you want from a stock screener is quick, easy research that allows you to make your own best decisions. With that directive in mind, let's look at three screeners.
Yahoo! Finance Stock Screener
This is what I use every day. It provides fast results that you can sort by any criterion. If you get too many companies, just add more criteria to whittle the list down, or make your parameters stricter.
For instance, in March 2007 I was interested in companies that had a price-to-sales ratio (P/S) below 5, a price-to-earnings ratio (P/E) below 20, and projected earnings-per-share (EPS) growth in the year ahead of more than 25 percent. I typed those criteria into the screener, and received 184 results.
That was too many, so I increased the growth rate to 50 percent. That still left 68 companies. Next, I dropped the P/E to 10, and got a tidy list of 20 companies. I clicked the "Growth" criterion header in the results table twice to re-sort the list in descending order from highest growth rate to lowest. The whole process took less than two minutes.
The fastest grower was LaBranche & Company (LAB $7.50), a New York City broker-dealer. It had a P/S of 1.1, a P/E of 3.5, and projected one-year EPS growth of 950 percent. I clicked to its key statistics page and found that the company had a healthy 31 percent profit margin, was 12 percent insider-owned, and that its $7.50 price was its 52-week low. That was down about 58 percent from the almost $18 it had fetched in April 2006.
I was curious to know what had happened. I clicked to its news page and discovered that the firm used to make its money by offering floor trading services on the New York Stock Exchange. As the exchange became electronic over the years, few people needed floor traders anymore, so LaBranche's earnings tumbled. Its market-making business was down 24 percent in the previous year. CEO Michael LaBranche said that his firm was slashing expenses and looking for ways to prosper in the new electronic marketplace.
Whether or not LaBranche succeeded (see for yourself by typing "LAB" into Yahoo! Finance and checking its current price) is not our concern here. What I want you to appreciate is how quickly I was able to find this potentially profitable recovery story using Yahoo! Finance Stock Screener, and how easy it was for me to conduct additional research with just a few mouse clicks.
The basic HTML screener is usually fine for me, but Yahoo! also offers a Java screener that's fancier. It has a regular desktop software-like interface instead of a webpage interface, and offers more screening criteria. It, too, is free.
For $14 per month or $132 per year, Yahoo! offers an even more deluxe screener with real-time data. I don't see why you would need that unless you're
daytrading, which is stressful, costly, and ineffective. Why pay for tools that encourage that lifestyle?
Stick with what's fast, free, and very helpful.
Contact: screener.finance.yahoo.com/newscreener.html
Morningstar Stock Screener
Morningstar's screener is another good alternative. It taps into the firm's helpful analysis tools like its stock types, equity style box, and grading system.
In March 2007, I screened for aggressive growth companies with "A" grades for growth, profitability, and financial health. That turned up 51 companies. I then clicked the "Score These Results" button and went to a score card where I could specify the importance of each criterion by clicking radio buttons between 1 and 10 beneath it.
The list of the top ten scoring stocks appeared to the right of the criteria and was updated on the fly as I clicked away. Consistently leading the list in this example were American Oriental Bioengineering (AOB $10) and Chico's FAS (CHS $22).
Contact: screen.morningstar.com/StockSelector.html
MSN Money Screener and StockScouter
MSN Money's screener takes a different approach. Its interface is simple with dropdown menus that keep searches focused on basic notions rather than specific data.
For example, the choices for P/E are just "Any," "As high as possible," and "As low as possible." The idea is that you probably don't care specifically if the P/E is 9.7, but just that it's low. The data set returned is usually small, but unfortunately it can't be sorted. I find myself feeling that something is being missed with this screener. It's just a little too basic, but could be handy for quick ideas.
A more useful tool to me is MSN Money's StockScouter. It's a rating system that assigns some 5,000 stocks a number from 1 to 10 on a bell curve, with 10 being the best potential for beating the market. In March 2007, there were 148 stocks rated 1, 670 rated 5, and 148 rated 10. I clicked on the group of 10-rated stocks, wondering as I did so why anybody would go anywhere else.
The group came up in a table with sortable column heads, and I could add columns to the table by checking boxes next to additional criteria. I sorted the table in descending order from highest to lowest expected six-month return. The top 42 stocks were projected to gain 15.17 percent in six months, and included Audible (ADBL $11), Freeport-McMoRan Copper & Gold (FCX $56), and Oceaneering International (OII $39).
Finally, MSN Money offers a deluxe screener via download. Personally, I prefer keeping everything online.
Contact: moneycentral.msn.com/investor
Best of luck with these free resources!
Don't buy Power Investor or any other databases. Use these free ones.Labels: Power Investor, Tools
One penny unlocks
The Kelly Letter
Apple, Health Care, and Starbucks
July 20, 2007
It's been a week since I spent much time discussing the iPhone and Apple, but the comments keep rolling in.
Here's subscriber Rory Sprouse on why the iPhone might have a chance in corporate America:I graduated college back in 2000 and went to work for a software company, one of the products that I worked more with was a PIM and e-mail synchronization tool for handheld devices. It was manufacturer agnostic, meaning that it could sync any Palm, Windows Mobile, or WAP device to the information on any Exchange, Domino, or standardized mail server.
I was talking with a friend of mine who works for a large storage company and was intrigued to hear that he's looking for a device to replace his BlackBerry. Turns out that corporate policy is changing and his company will no longer be allowing new users to purchase and use a BlackBerry on the corporate server.
A BlackBerry is a staple in most corporations these days. It is a fairly versatile device, but it does one thing really well and that is get push e-mail: when a message arrives on the server, it is pushed to the device instantly. So if you are at your desk or sitting on the beach, a message arrives on your device right when it hits the server.
BlackBerry Enterprise Server is a middleware product. You have to have a dedicated server to handle all of the BlackBerry traffic. The server communicates with the Exchange or Domino Mail server. So, for example, I send this e-mail to your corporate account. It travels across the net and gets to your corporate server. The BES (BlackBerry Enterprise Server) has monitoring on your mail server, which intercepts the message and triggers a copy to be sent to RIM's headquarters in Canada and then it is sent over the cellular networks to your device where you get it instantly if you are within a coverage area.
So, the total cost of ownership for this service is expensive. You have to purchase the BES, a moderately powerful server to handle the software, whatever costs you incur to have an extra server on the network, and then you must purchase a license for every device, buy the devices themselves, and subscribe to a data plan for each device.
Microsoft announced Direct Push technology for Exchange some time last year. Basically the Exchange Mail server has the functionality built in to talk to phones and/or hand-held devices over a network (wireless or cellular). When mail hits the Exchange box, there is no middleware. But the Exchange box has network connections that make it just like you are on the local network, and pushes the message instantly to the device where you get it.
When I was working with this technology, we had a trigger if the device was offline to send an encrypted text message to the device to synchronize and securely download the message over the data network. I'm not sure about the specifics on how Direct Push Active Sync works these days, but it is similar.
The key point here is that the push capability is built-in to MS Exchange. It supposedly offers very robust functionality. You can send a command to "kill" the device if it is lost or stolen. It will wipe all data from the device with the command. I assume RIM has this, too, but am not sure. But the interface is 100% Microsoft so it is familiar to people. And any Exchange administrator can handle it as it is basic functionality built-in to the software that they are supposed to be experts on.
Using Microsoft Exchange instead of BlackBerry's middleware dramatically reduces the cost of ownership. You need no additional box or software for it and no additional licenses for clients. You can purchase any Windows Mobile or Palm device to use. They have the ability to wirelessly sync in real time built-in to their default mail clients. You don't have to purchase any software other than the device. The other key here is that a Palm or Windows Mobile device has additional functionality and the ability to run other third-party applications such as CRM for sales forces, native opening and editing of office documents, and so on.
Plus, most people carry a BlackBerry in addition to a mobile phone, so there's no need for the extra data service on the BlackBerry if they already have it on their phone. Most U.S. cell carriers charge less per month for device data than for BlackBerry data.
As companies discover that they can save money while getting the same functionality, we may see a trend away from BlackBerry.
There are rumors that the iPhone will have Active Sync technology built into the mail client in a near-term firmware update. People are always impressed by some of the things I can do with my Treo. The unbelievable screen on the iPhone has got to be even better. And don't discount Jobs's vision to the future to go after business users or come out with a more reasonably and competitively priced device.
Since at least one leading large Technology company appears to be moving away from BlackBerry, others might be thinking about it as well. The iPhone could be just the device to fill the hands of people seeking a replacement for their forbidden BlackBerry. Something tells me that if such a trend got underway, RIM would adjust its pricing and methodology in order to retain its appeal, but upsets happen in business all the time so maybe Rory has identified the bridge over RIM's moat that Apple will use to break into the market.
In my July 10 article, I doubted the conclusion from Scot's Newsletter that Macs are cheaper than PCs. I wrote:I'm not sure what to make of Scot's piece. He compares a "tricked out" Dell model to one of the Macs and comes away with the Dell costing some $650 more than the Mac, due to it needing a faster processor. Scot's analysis is good and he has the data right, I'm just not sure that most people would consider needing the top-end processor at Dell to be equivalent to the Mac in question. Technically, yes, the specs didn't line up without Dell's top choice, but I've never met anybody who needed the $3,500 Dell M170.
Most people are probably like me in that they look at the hands-on stuff more than the internals of a new machine. I wanted a 17-inch screen, separate 10-key number pad because I do so much with numbers in the stock market, and a general coolness and appeal. These days, nearly any computer can do what you want it to do as far as the internals go. None come with tiny hard drives anymore, for instance, and the slowdown in my work happens more often in my brain than in the computer's processor. So far, I haven't been able to upgrade that!
So, my own quick analysis of paying $1,400 for my HP Pavilion dv9000 17-inch when the MacBook Pro 17-inch costs $2,800 seems to support the idea that Macs cost twice as much by the way most people approach it. Also, had I taken the time to gather a few rebates from electronics stores, I could have paid less than $1,400 for the HP. That's never an option for Macs, as far as I know. Do they ever go on sale? To that, Scot replied:I think you missed the point that I was making. I didn't address just the very top of the Mac line-up. I addressed several parts of it, including the low end.
It's true that if the PC you have to have or can afford to have fits in between the market positions of Apple's models, then you'll be able to find something that costs only a little less (or a little more) than the corresponding Apple model -- and that flexibility may hold extra value for you. But that extra value is not transferrable to everyone. It's about your personal preference. And it also works in both directions.
It's also not an apples to apples comparison about absolute, or intrinsic, value. Most Mac users have no trouble at all picking out a model that suits them. It's not like Apple has too few models (though I do wish they had a few more). The point is that to get at the true value question you have to review comparable hardware on both sides. Otherwise, all you're comparing is price.
The only way to get at value is to level the playing field. When computer experts dissect the level of hardware in comparable products, what you find is that sometimes the Apple hardware has more value, and sometimes PC hardware does.
There is another important factor. When you look at this over time, the value fluctuates again. Computer value is always changing. So any one snapshot in time is only one data point. That's all my story delivered. Were I to do it again now, the results might change. The point is this: It used to be true that Macs were more expensive than PCs. It's just not true any longer.
By the way, my article was just about the hardware vs. the hardware. I have more coming up about the software and the real world experiences of using both Windows and Mac hardware. As a long-time Windows expert, I think I have a far more objective viewpoint on this than most people writing about it. The honest truth is that Macs have picked up a good deal of steam on the software front.
And, you won't want to believe this, but Macs are far, far less problematic than Windows PCs -- even the best Windows PCs. Literally, this is true: If you count up the number of times that your Windows PC won't play the DVD, gives you an error message, freezes, requires a reboot, won't connect to the Internet, and so forth -- things that Windows users have learned to endure as if they're just the cost of using a computer -- and compare those same types of maladies on the Mac, the results are surprising:
You are three or four times more likely to experience a stop-everything-and-fix-it-or-give-up-on-it problem on a Windows PC than you are on a Mac.
I'm not saying Macs don't have issues. They do. It just happens a lot less frequently. I was surprised by how less frequently. OS X in particular has made the Mac far more reliable. Shortly after sending me that note, Scot posted his July issue which included Mac vs. PC Cost Analysis, Part II.
He'll get no argument from me about Macs being more reliable than PCs, and I agree that it's a factor to consider when comparing the cost of ownership. I've written here before that I estimate I lose about 10% to 15% of productivity in my office due to chasing down mysterious PC blow-ups. And good luck anytime you have to network or connect anything new. Somehow, there's always a piece missing.
Perhaps Scot's right that an apples-to-apples comparison of hardware and software on PCs and Macs will show that Macs no longer cost more. I hope so, because I'm planning to switch my office on our next upgrade cycle. I've already had my fill of calls to support centers in India (which never have the answer), useless FAQ-style websites that prove none of my issues are frequent enough to be worth solving, and all the DLL registry blue screen fatal error runaround garbage to which Scott refers. My favorite recent trend is pointing frustrated users to message board systems where issues are supposed to be answered by...other frustrated users! A brilliant cost-cutting measure.
PCs have been an adventure, but I'm a switcher in the making. I just want to get my work done and never think about what happened inside the computer to make it possible. The slogan has bewitched me: Macs just work.
U.S. Health Care
Readers keep commenting on my series on health care in the U.S., spurred by Michael Moore's new film, SiCKO.
Brent Bradley in Felton, California wrote:Michael Moore is a certified nutball, right up there with Al Gore. Please do not put any stock in anything the man says. Of course our health care system is broken. The deterioration started in the Lyndon Johnson era, with the implementation of his "Great Society." Any idea how people were cared for in the pre-Medicare era? It was called charity and all doctors practiced it. In fact, before LBJ, a medical doctor was an upper middleclass profession. With the "Great Society" came an infusion of government money, along with all the bureaucratic redtape. It's been downhill ever since, made even worse with Bush's Prescription Drug Plan.
I also refute the claim from one of your readers [Robert J. Manna in Rome, Georgia, whose comments appeared on Wednesday] who says there is no emphasis on "health care," only crisis and treatment. Every day there is news about the benefits of eating right, exercising, forgoing processed foods, etc. There are constant reminders to have one's breasts or prostate examined. Mostly we ignore it and then look for a scapegoat when something goes wrong.
I'm very sorry about your mother's horseback riding accident, but even that was preventable and shouldn't be a burden on taxpayers. Hopefully people that love your mother will do all they can to help. Beyond that, hopefully her church, horseback-riding friends, etc., will step up. Sucking on the teat of the government is anti-American and anathema to freedom. America is indeed blessed with a strong spirit of charity. The mountain communities of Allenspark and Estes Park, Colorado, did come forth to help my family during my mother's time in the hospital. The refrigerator was always filled with homemade food, a church established a paid account at a local gas station for members of our family to make the long drive to Denver without worrying about the price of filling up the tank, and people organized fundraisers that we all attended.
But, is it really a wise national policy to expect such efforts to happen every time a person is involved in a catastrophic accident? Can little Allenspark and Estes Park be expected to raise $2 million at a chili cook-off sponsored by the Caring Allenspark Committee and held at the fire station? Of course not.
The price of health care has reached a point where ordinary folks simply can't afford it. That happened long ago. We're quickly reaching a point where even insurance companies are balking, and that means that prices are just unreasonable. The market is not working properly because external forces have intervened: lobbyists. Take them and their price fixing out of the equation, and simple supply and demand would have hospitals scrambling to offer plans that work for people. Otherwise, they'd have no patients.
As for whether it's the goverment's job to care for a person injured in a horseback riding accident or other risky activity, not per se. However, horseback riding is not the same as using intravenous drugs. Riding horses is not irresponsible any more than driving a car is irresponsible. Accidents happen no matter what. When they do, is it wrong for people to expect a safety net to catch them?
Call it socialism, call it communism, call it un-American, but it can also be called compassionate and the way of the future. What Michael Moore points out in SiCKO is that socialized health care is working in other countries, and that maybe we should think of some parts of it that might work in the U.S.
When it comes right down to it, most people probably don't think in lofty terms of free markets vs. socialism. They just want to get well. In Japan, getting well involves merely going to the local clinic with a complimentary postcard from the city where you live. The postcard thanks you for paying your taxes and suggests getting a check-up. In America, good luck.
That's the difference, and there's something cold and wrong with "good luck, this is America, you're on your own" to pay $500 for a bottle of medicine that's sold for $5 elsewhere. What's un-American is a caste system that offers health care to some, but not others; a slap in the face of the once self-evident truth that all are created equal.
Someone who's closer to Brent's way of thinking than mine is Lorraine R. in Atlanta, who wrote:There are a few things everyone should keep in mind.
First, former Colorado Governor Dick Lamb caused a huge controversy when he said "Old people must realize they have an obligation to die." In his review of medical costs he found that the greatest percentage of medical dollars are spent on old people within six months of their death. Does an 85-year-old with a pacemaker really need a new hip? Should a 70-year-old with a catastrophic stroke really be put on a ventilator in ICU for 3 weeks?
Second, we should all own up to our responsibility to carry health insurance. I hear about the excessive cost but for most people it's about the monthly cost of a new car. There are an awful lot of luxury cars on the road. Am I to believe someone can afford a Porsche but not health insurance?
Third, malpractice suits need to be limited. [Bad stuff] happens. Sometimes babies are born unhealthy through no fault of the doctor. Sometimes operations go wrong. And, yes, sometimes doctors make mistakes. Unless it's something egregious, the doctor shouldn't have to pay for an act of God.
We've become a nation of moaners and groaners. It's always someone else's responsibility, someone else's fault. We think there's a free lunch out there somewhere and we're missing it.
Why do the wealthy and powerful come to the U.S. when they're sick if they have such great health care in their socialized medicine country? Castro was almost killed by his Cuban doctors -- they had to bring in one from Spain to correct the damage.
Michael Moore tells stories from his personal viewpoint, the truth be damned.
The fact is free competition provides the best quality at the best price for every product, including health care. Doctors should develop a "patient outcome" index that shows how well they diagnose and treat diseases and a "patient satisfaction" index that shows what patients think of the care they've gotten, and compete on those. They don't want to be judged but they do want to be free to charge whatever they think is fair. I say, let the market decide. Next, here's Dr. Eric Chu from Canada:I'm a physician practicing medicine in Canada who recently returned to Canada after four years of critical care medicine fellowship at Boston's Harvard Medical School.
When I first went to Boston six years ago I (and many of my peers) had a "grass is greener" perception of medicine in the U.S. But after four years of taking care of patients and seeing how other physicians practice medicine in several of the top U.S. hospitals, I have come to the conclusion that the quality of the medical care that patients receive in the U.S. and Canada are very, very similar.
About 1-2% of U.S. patients do get better necessary care, about 20-30% of U.S. patients believe they are getting better care when it is more or less the same, and 5-10% of U.S. patients don't get the care they should because they are uninsured.
Similarly, about 20% of Canadian patients believe they would get better quality of care in the U.S. than in Canada, but I think this is just a perception. Some patients do get better treatments in the U.S. through access to certain innovative treatments that are not yet accepted as standard of care and may not yet be available in Canada. Also there is better access to elective non-urgent treatments in the U.S. But the vast majority of patients in Canada get the basic medical care they need.
Both the U.S. and Canadian systems are far from perfect and both have areas in which they excel. Both suffer from the problem that health care in not cheap and patients want the best possible care for the least amount of money. The major problem with the Canadian system is that a lot resources are spent on acute care (emergency room patients, urgent surgeries, critically ill patients) and there is less left over for elective non-urgent cases.
Thus, a patient will get his chopped-off fingers reattached "for free" (there's no wait because you can't afford to wait), but the patient who needs that same operating room for his cataract surgery might wait nine months because it is not urgent.
By the way, I have read in comments about SiCKO that people wait nine months in Canada for bypass surgery. I have to say that that is absolutely not true. In Toronto, if someone needs cardiac bypass surgery they will get it ASAP -- within a few weeks. In Canada, everyone has medical coverage, in the U.S. that's not the case. In the U.S., if you have good insurance you will get the treatment you need, especially elective non-urgent treatments in a more timely manner.
There are two areas that compound the cost of health care in the U.S:
⇒ The existence of for-profit HMOs and,
⇒ The prevalence and threat of lawsuits
The Canadian healthcare system is administered by the government. It is not the most efficient system, but it is far, far less expensive. Furthermore, it is efficient for patients in that they do not have to think about getting health care, deciding what kind of health care coverage (deductible, cap, in-network/out-of-network, etc.), or worrying about whether they have coverage when they need treatment.
An article in the New England Journal of Medicine showed that health care administration is more than three times more expensive in the U.S. than in Canada:
"In 1999, health administration costs totaled at least $294.3 billion in the United States, or $1,059 per capita, as compared with $307 per capita in Canada."
The reason for this difference as outlined in SiCKO is that HMOs must make a profit and you, the consumer, are paying for your health care and for the profit of HMOs.
The threat of lawsuits is actually more damaging to medicine than the prevalence of lawsuits in the U.S. One reader [Hans Burkholder, whose comments appeared on Wednesday] mentioned a malpractice premium of $300,000 in Florida.
This year I will pay about $5,000 Canadian dollars for malpractice coverage for practicing critical care medicine and I never have to worry about my premiums going up because of any malpractice claims brought against me. But the biggest reason I chose to return to Canada to practice medicine is because of how the threat of lawsuits has negatively impacted the way physicians practice medicine in the U.S.
As your surgery resident contributor mentioned, doctors in the U.S., out of an unnecessary fear, order "reams of unnecessary tests." The system is plagued by frivolous lawsuits which have actually changed the way physicians practice. Extra tests mean extra time and effort wasted for the patient and add significantly to the cost of delivering health care in the U.S. There is something wrong when after 11 years of medical training, against your better judgment, you spend your days compelled by fear to order a test that you know is not necessary and which you wouldn't even order on your own mother.
Years ago an economics major friend argued with me that health care dictated by a free market system would be more efficient and cheaper. HMO's are the U.S. health care system's free market and the courts of law are the system of checks and balance. Because of their own self interests, neither of these systems has helped to reduce costs or improve efficiency.
Finally, I am very glad to hear that the health care system worked for you and your mother. I'm sure it makes the exorbitant bill much easier to swallow. Very well-written, and gets to the point of the free market system being the answer. People think that because we're talking about America, we're talking about a free market. We're not. It's a controlled health care system where the laws of supply and demand don't apply anyway, so who are we kidding?
It's clear from the doctors writing in that frivolous lawsuits have to go. Litigious America is killing itself by driving the costs of health care to levels beyond reason. Any lawyers out there care to comment?
Starbucks
I wrote yesterday that Starbucks looks like a good value to me based on its dominant brand, good partnerships, and growth plans, and that I would look to pick up shares at or below $25. The stock gained 4.6% yesterday, thanks to my article and the market-moving power of my massive readership.
Well, it probably wasn't just because of my article. It could also have had something to do with rumors that it would strengthen its partnership with PepsiCo and develop a premium hot chocolate drink with Hershey, as reported by Forbes.
One reader, Eric, called me to task for failing to justify my target buy price:You say wouldn't buy it above $25/share yet you make no reasoning for 25. Jim Cramer makes these claims all the time, "don't buy company X under 100." But Jim Cramer is more suited as an entertainer than an intelligent and rational investor. My question is why $25? Why not $30? Why not $23? Do you see my point? Your $25 seems like an arbitrary number, there's really no real analysis behind it. I mean, I have no idea if you think this is a 50-cent dollar, a 30-cent dollar, or an 80-cent dollar. If I'm buying a shipping company for half of its ship's scrap value, it's clearly a 50-cent dollar or cheaper, but I have no idea about your reasoning behind Starbucks. Any explanation would be quite helpful. Ah, just when I thought I could sail into the weekend.
Actually, Eric raises a valid point. I did toss $25 out there at the end of the article without explaining it.
The stock bounced off $25 and change twice in the past month. Throughout its history, SBUX has traded at a 1.25 to 1.5 multiple to its growth rate. It's trying to hit an 18% earnings growth rate this year, but looks ripe for a disappointment. That makes me leery to jump right in, knowing full well that big pops like yesterday's are always a possibility.
Run an 18% growth rate times a multiple of 1.25 and you get $22.50. Run it against 1.5 and you get $27. Take the average and you get $24.75, slightly less than the $25 I mentioned as my target.
Longtime subscribers know how I feel about targets. They're flexible until I place an active order. I think Starbucks is ripe for a disappointment and that the stock could well get to the low-$20s before rebounding solidly and convincingly.
A chart-watcher wrote to tell me that the stock's double bottom off the $25-ish range suggests that it won't ever get to my sub-$25 target area. Funny thing is, that same chart-watcher told me the same thing about SBUX when it bounced twice off the $29-ish range back in March. Double bottoms don't always hold, and it's frequently worth looking beyond chart patterns.
I don't think there's a need to rush to buy Starbucks yet.
This weekend to subscribers: What the Fed said, why we're sitting pretty in semiconductors, how we're closing in on the stocks we've been watching so patiently, and more.
Next Week on this free site: Alternatives to my long- recommended Power Investor software, swing trading versus buying and holding, the accusation that my permanent portfolio strategies are "beyond ludicrous," weaknesses in Google's advertising platform, and more.
It's all part of what one reader called "the best bargain in the business." Tell your friends.
Have a great weekend!Labels: AAPL, Health Care, SBUX
One penny unlocks
The Kelly Letter
Is Starbucks A Buy?
July 19, 2007
Several subscribers wrote recently to ask about Starbucks. Is it undervalued at current prices, and worth buying?
I think so.
From its split-adjusted price of $4.50 ten years ago, SBUX rose 789% to $40 last November. It then declined steadily to $29 in early March, rose to $32 over the following two weeks, then declined to $25.50 on June 22. It closed yesterday at $26.50, a 3.9% gain from its low a little less than a month ago, but still 34% lower than its November high.
So, what's the problem at Starbucks now?
Its chairman wrote in a memo that the company's expansion from 1,000 locations to more than 13,000 has watered down its brand. That doesn't bode well for plans to add another 1,700 U.S. locations this year. Some analysts project that the company will eventually top more than 30,000 locations worldwide.
Also, insider sales of stock by the chairman and other officers last year made some question the stock's valuation. In retrospect, the officers were right to sell last year. Some are waiting to see them start buying again as the "all-clear" signal to begin investing.
The reason I think the stock offers more upside than down from here is that, despite its massive market footprint, Starbucks is in a business that has room to grow. Its many stores are not a negative, they're a positive in the sense that the number two coffee chain in the U.S., Caribou Coffee, has fewer than 500 locations. Starbucks has 9,400 and will top 10,000 by year-end. Having twenty times the presence of its nearest competitor is quite an advantage.
As for concerns that the coffee business is saturated, I don't share them. Neither does the Specialty Coffee Association of America, which pointed out that only 15% of adults in the U.S. drank a cup of specialty coffee each day in 2005. Too, Starbucks does a lot more than just coffee. It was brilliant at creating a menu with something for any kind of weather, and that brilliance has continued in all of its endeavors.
It faces challenges. Its ambitious expansion plans could go awry, especially in new markets like Brazil, India, and China. In the latter market, it already got into some trouble when it opened a store in the Forbidden City in 2000, only to close it under intense pressure last Friday when accused of trampling over Chinese culture.
Growing pains are inevitable, though, and it's better to have them than not. They mean the company's trying to grow, after all.
Another challenge facing Starbucks is increasing competition. Its biggest threat might be not from another coffee chain, but from McDonald's, which is offering its own premium roast coffee. Other encroachers include Tim Horton's, Dunkin' Donuts, and Panera.
Of these threats, only Panera looks legitimate to me. Nobody thinks of hanging out and doing work or homework at McDonald's. Tim Horton's is just another coffee shop, and Starbucks has proven quite adept at crushing all comers in that category.
Panera, though, offers an experience that is comparable to Starbucks's experience, if not better. I've worked on Panera's free wi-fi network in the states, and it was excellent. The food is fantastic and the coffee is great. It's a real restaurant and bakery that offers coffee, as opposed to a coffee shop that offers some baked goods.
That said, Panera is far, far behind Starbucks. It's not as quick to get in and out, it's not nearly as available with just over 1,000 locations, and its brand is nowhere close to being as recognizable as Starbucks's. Plus, Starbucks has a lot more partnerships in place, with its brand appearing on grocery store shelves, airport kiosks, and on hair barrettes worn by high school girls in Japan.
All in all, I'd say the recent discount on SBUX presents an opportunity. I would hold out for $25 or less, a 6% drop from yesterday's close.
Tomorrow: A long read ahead of the weekend covering the iPhone, U.S. health care, and Power Investor software. Don't miss it!Labels: PNRA, SBUX
One penny unloc |
