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Sunday links: taking the blame
Quote of the day
Ryan Detrick, ?Next time you have a losing streak, ask yourself if it is your fault? Or the market?s fault? Hopefully, you realize the only way to get better is to take the blame, learn from it, and profit the next time.? (Schaeffer?s Trading)
Chart of the day
Top clicks this week on Abnormal Returns
Thanks for checking in with us this weekend. Here are the items our readers clicked most frequently on Abnormal Returns for the week ended Saturday, October 26th, 2013. The description reads as it does in the relevant linkfest:
I am so glad these people exist... (Bronte Capital)
99% of long-term investing is doing nothing. (The Dumb Money)
Got three minutes? Don?t check your phone. Do this instead. (Time Back via @allanschoenberg)
?Safe? stocks are expensive. (Mebane Faber)
Welcome back to the ?age of bullsh*t investments.? (NYMag)
How to reinvent yourself. (Altucher Confidential)
It?s taken some effort but retail investors are jumping back in. (The Reformed Broker)
Warren Buffett on the importance of luck in life. (Business Insider)
David Rosenberg earns the wrath of permabears for changing his mind. (WSJ)
If you feel compelled to do something: don?t. (Tony Schwartz)
What else you may have missed on the site this week:
Investing as a hobby. (Abnormal Returns)
Life?s too short: Fantex edition. (Abnormal Returns)
Thanks for checking in with Abnormal Returns. You can follow us on StockTwits and Twitter.
Saturday links: broken models
The weekend is a great time to catch up on some long form items that we passed up on during the week. Thanks for checking in.
Investing
A dozen things learned from Michael Price on investing. (25iq)
Flexibility is the key to maintaining withdrawal rates in retirement. (Vanguard via Total Return)
What assets should go in a ?desert island? portfolio looking out three years? (Research Affiliates)
Institutional investors are for the most part using broke investment models. (Above the Market)
On the dangers of overfitting your backtests. (Timely Portfolio)
Finance
Revisiting the 1987 crash from the lens of the Chicago pits. (Points and Figures)
What can physicists really add to finance? (FT)
A profile of Joe Mansueto, CEO and founder of Morningstar ($MORN). (FT)
Startups
On the downsides of the democratization of angel investing. (Wired)
The decline of Wikipedia. (Technology Review)
Food
A Vitamix blender will change your life. (Slate)
The company behind Sriracha. (Quartz)
Coffee vs. smoothies: which is better for you? (BBC)
Water continues to displace soda at the supermarket. (NYTimes)
Long lines at a restaurant are overrated. (Marginal Revolution)
Dating
On the rise of online dating. (Priceonomics Blog)
Young people in Japan have stopped having sex. (Guardian)
Flying
Airline seats are shrinking. (WSJ)
Winglets are getting an upgrade. (NYTimes)
Sports
Soccer players show signs of brain disease. (Scientific American)
An excerpt from Rich Cohen?s Monsters: The 1985 Chicago Bears and the Wild Heart of Football. (WSJ)
Books
On the unknowable: Noson S. Yanofsky?sThe Outer Limits of Reason: What Science, Mathematics, and Logic Cannot Tell Us. (Reading the Markets)
Why our need to be Social: Why Our Brains Are Wired to Connect is an inherent need according to Matthew Lieberman. (Scientific American)
A talk with Scott Adams author of How to Fail at Almost Everything and Still Win Big: Kind of the Story of My Life. (HBR)
An excerpt from an interview with Bill Watterson author of Calvin and Hobbes. (Mental Floss)
A Billionaire Visionary's Next Big Idea
Biotechnology is a notorious minefield for investors. For every successful drug that survives the approval process, dozens more simply flame out. Millions of dollars of capital evaporate every time a clinical trial fails to produce positive results.
Yet a select group of biotech visionaries manage to strike it big -- time and again. They have a knack for spotting biotechnologies that ultimately prove their mettle through the Food and Drug Administration's rigorous process. And few have shown the gift of biotech insights like Randal J. Kirk.
Kirk has built his fortune by focusing on drugs that have blockbuster potential. And he's shown the patience to stick with them -- for years, if needed -- until his vision is realized. The payoff: He netted a $1.2 billion profit in 2007 when Shire (Nasdaq: SHPG) acquired New River Pharmaceuticals for $2.6 billion. New River had developed Vyvanse, a key drug in the treatment of attention deficit hyperactivity disorder (ADHD).
Four years later, Kirk struck gold again as Forest Labs (NYSE: FRX) paid him $600 million for his majority stake in Clinical Data, which had developed Viibryd, an anti-depressant drug that hit the market in 2011.
Since then, Kirk has remained off the radar. Sure he's been a major shareholder and director of small biotech firms such as Ziopharm Oncology (Nasdaq: ZIOP), Fibrocell Science (AMEX: FCSC), Oragenics (AMEX: OGEN), Halozyme Therapeutics (Nasdaq: HALO), and Synthetic Biologics (NYSE: SYN). His name routinely pops up on insider buying lists associated with these companies. But his real passion is for a company that's he's been nurturing for half a decade and recently took public in an initial public offering (IPO).
That company, Intrexon (NYSE: XON), has been developing a set of tools that enable scientists to step inside the human gene and alter its basic structure. The company isn't concerned about coming up with a blockbuster drug. It wants to provide the tools for other biotech firms to make major breakthroughs. So what exactly is Intrexon looking to accomplish? The company is in the field of synthetic biology, which alters the core mechanisms of action taking place inside cell walls.
3rd-Quarter Earnings Season: What To Watch For
Throughout the summer, investors were treated to a steady drumbeat of sobering news.
Retail sales were flattening out. China and other emerging markets appeared set to consume less of our exports. The steady implementation of the budget sequester was leading to a drop in government spending on technology and services. And many companies showed a lot more interest in buybacks and dividends than capital spending, which is a sure a sign of CEO pessimism.
So how do you explain the surprisingly robust profit picture being delivered in the current earnings season?
With roughly 40% of the S&P 500 weighing in thus far (and another 25% to go next week), 68% of all reporting companies have delivered a positive earnings surprise, according to Standard & Poor's. That compares with just 18% of companies reporting negative surprises. Frankly, I wouldn't have been shocked if those numbers were reversed. The odds against yet another stellar earnings season seemed quite long.
Year-over-year comparisons tell the story. Among companies in the S&P 500 that have reported third-quarter results thus far, profits are up 8.4% from a year ago, more than triple the expectations of 2.5% for these companies. The profit gains are coming on 3.3% annual sales growth (from the third quarter of 2012), which tells you that companies are once again finding ways to boost profit margins.
The key driver of those margins: productivity gains, as companies are able to produce higher output with a fixed base of employees and assets. Rising productivity is a great sign for the economy; it was the key reason for the economic boom in the 1990s.
But this isn't the '90s, not by a long shot. Today's stiff headwinds are quite real. Out in the real world, many will tell you that the economy feels lousy. Retailers are bracing for a tepid holiday season after lackluster back-to-school sales. And even as corporations report solid profits, few have discussed plans for major investments in capital expenditures, which is the real driver of future economic growth.
Another contrast with the '90s: Back then, much of the job creation and dynamic economic activity was fueled by small businesses. These days, the action squarely resides with already large companies that are simply growing yet larger.
Amazon.com (Nasdaq: AMZN) is a great example. Its shares surged nearly 10% on Friday to another all-time high as its North American sales grew a whopping 31% from the third quarter of 2012. The fact that Amazon is "still in the very early stages of international development," according to Benchmark Capital, explains why this company is expected to keep growing at a meteoric pace.
But Amazon creates a huge conundrum for investors. Its stock valuation bears no relevance to current measures such as cash flow or profits. So investors are asked to focus on the company's impressive operational execution -- and to simply ignore traditional valuation measures.
And Amazon's numbers don't signal a revitalization in consumer confidence. Instead, the company is simply stealing market share from other retailers in a zero-sum game. In the fiscal fourth quarter that begins in November, Macy's (NYSE: M), Kohl's (NYSE: KSS) and Target (NYSE: TGT) are all expected to post modest revenue drops.
Warren Buffett Is Wrong -- Here's Why...
Don't get me wrong, I closely follow what Warren Buffett says and does with his money.
And yes, he's one of the most successful investors in history -- his returns over more than 60 years have made him the fourth-wealthiest person on the planet.
He is rarely wrong, but Buffett is not perfect, and a recent comment he made is, in fact, incorrect.
Let me explain...
The Wall Street Journal found that Buffett made $10 billion on the investments he made at the height of the financial crisis. With characteristic humility, Buffett said, "In terms of simple profitability, an average investor could have done just as well investing in the stock market if they bought during the panic period."
Actually, an individual investor could have done significantly better than Buffett.
To earn $10 billion, Buffett invested $26 billion. His return on investment was about 38%, or 6.7% a year over the past five years. The Journal article says Buffett made his first crisis investment in April 2008 and added to his investments throughout the crisis. He made a number of deals late in 2008 and one as late as April 2009, after the stock market had bottomed.
Assuming an individual investor had $10,000 and invested one-third in S&P 500 at the close in April 2008, one-third in November 2008 and the remaining third in April 2009, an individual would have beaten Buffett. That simple strategy would have gained 74%, or 11.7% per year.
Simply put, because those three months were the months when Buffett was most active during the financial crisis, all it took to beat Buffett required investors to buy when he bought.
Buffett's timing was, as usual, nearly perfect on his investments. But Buffett has a disadvantage compared with individual investors. He can only invest in the largest companies because he has to make large investments to have an impact on his returns. A large gain on a small investment will not increase Buffett's wealth much in dollar terms, but that same gain could have a significant impact on the wealth of an individual who is not a billionaire.
Individual investors would have easily been able to beat Buffett's returns over the past five years, and they should be able to beat his gains over the next five years.
In fact, following my Maximum Profit trading strategy during the financial crisis would have provided a total return of 157%, more than four times as large as Buffett's gain. And in the past decade, the Maximum Profit system would have outperformed Buffett's Berkshire Hathaway by 357%.
If you're not familiar why my Maximum Profit system, it's pretty simple.
Spot Big Dividend Hikes With This Value Metric
Individual investors and private equity firms often target companies with great yields. But they are talking about two different numbers.
While the first crowd focuses on divided yields, the big-game hunters focus on free cash flow yield. In fact, if you draw a connection between the two, you can find the path to stocks that are capable of robust dividend growth -- and just may get acquired at a nice premium.
To understand why free cash flow yields are so important, you just need to look at the frenzied pursuit of Dell Inc. (Nasdaq: DELL) by Southeastern Asset Management, Silver Lake Partners, Carl Icahnand Michael Dell. All of these big-money players knew that Dell Inc. was quite undervalued in the context of its prodigious free cash flow.
Over the past four fiscal years, Dell has generated a cumulative $14.5 billion in free cash flow. That's just $2 billion less than all of Dell's enterprise value. Assuming that Dell is able to maintain that level of free cash flow, then the current proposed buyout will pay for itself in less than five years. After that, it's pure profit.
Many private equity firms can do even better by using their target's balance sheet to borrow money to pay for the deal. In this era of rock-bottom interest rates, low borrowing costs can create some pretty compelling deal economics. In just the technology sector, there are a host of other companies that have limited growth prospects but generate huge amounts of free cash flow.
Here's a quick peek at tech firms with free cash-flow yields (free cash flow dividend by market value) in excess of 10%.
Friday links: keep doing what they are doing
Quote of the day
Dan Greenhaus, ?If the central bank stays accommodative and earnings keep doing what they?re doing, why not?? (Business Insider)
Chart of the day
Buy This Leader In Mobile Payments On Its 55% Pullback
The death of cash has been fueling a gold rush for payment processors. Industry leaders Visa (NYSE: V), MasterCard (NYSE: MA) and Heartland Payment Systems (NYSE: HPY) have all posted market-beating gains of at least 29% this year.
But while these well-known blue chips have been surging, one of their lesser-known industry peers has been struggling. After losing market share and reporting a disappointing quarter early in the year, shares are down 50% in the past 18 months.
VeriFone Systems (NYSE: PAY) is a global leader in the electronic payments industry, making point-of-sale (POS) machines that consumers use to swipe credit and debit cards. Its clients include some of the biggest and most successful retailers in the world, including Costco (Nasdaq: COST), Lowe's (Nasdaq: LOWE) and McDonald's (NYSE: MCD).
But despite that market-leading position, VeriFone has struggled in the past year and a half. And that's exactly why it's a great time to check out the payment systems leader and recent industry laggard: Shares and sentiment are low, but the seeds of a turnaround are beginning to sprout.
One of the biggest factors weighing on VeriFone's share price in the last year was management's tarnished credibility after a series of bad revenue forecasts and earnings misses. To remedy the problem VeriFone went straight to the top, recently appointing former Citi Cards CEO Paul Galant as its new CEO.
Galant will continue to oversee the company's major push into high-growth, high-margin mobile payment systems. In September, VeriFone introduced GlobalBay Merchant, a payments software suite for its small and midsize merchant clients that runs on Apple (Nasdaq: AAPL) tablets. At the time of the launch VeriFone had already contracted more than a dozen partners that serve more than 500,000 merchants. Looking forward, VeriFone expects more partners to sign on that can offer its systems to an additional 2 million to 4 million U.S. customers.
But Apple's iOS isn't the only operating system where VeriFone is targeting mobile users. In June, VeriFone announced a strategic partnership with Lenovo to offer an enterprise-class mobile payment system for its Windows 8 tablets. VeriFone began offering its mobile solutions on Android, the world's most popular mobile operating system, in 2012.
VeriFone is also moving aggressively to tap into high-growth taxi-payment solutions, recently releasing a new mobile app called Way2ride that lets users pay a cab fare with a smartphone. The program is up and running in New York City and will soon be launched in other major cities as well. VeriFone's global taxi business is also just one of two approved payment systems providers for new "green" taxis in upper Manhattan and New York City boroughs.
VeriFone
VeriFone is making a major push to control the mobile payment systems market.
VeriFone is tapping into high-growth emerging markets with its growing portfolio of market-leading payment solutions. Last quarter VeriFone said it had won a proposal for 450,000 terminals with Sberbank, Russia's largest bank. In Brazil, VeriFone just landed a contract with one of the country's largest payment processors. In India, VeriFone renewed a contract with the country's largest petro provider that owns and operates thousands of gas stations. In August, VeriFone announced its mobile commerce and payment system was selected by SNCF, the operator of the French National Railroad, which serves more than 100 million people a year.
VeriFone is also in position to cash in on the growing implementation of EMV (Europay International, MasterCard and Visa), a worldwide standard for the interaction between "smart cards" and approved payment devices. This requires both merchant hardware and software upgrades and has already triggered a wave of conversions from VeriFone's existing clients.
VeriFone has been aggressive on the buyout front, acquiring 15 companies in just the past three years, but VeriFone is now moving to strengthen its balance sheet, paying down $160 million in debt last quarter. That leaves cash and equivalents of $309 million and total debt of $810 million, down $102 million from last year.
There is also rampant speculation that VeriFone itself will be acquired. Although no specific names have emerged as early leaders, the company's market cap of $2.5 billion would be an easy target for Visa or MasterCard -- worth $129 billion and $86 billion, respectively -- to absorb.
Analysts are calling for earnings growth of 15% in 2014 and 14% annually in the next five years for VeriFone, which does not currently pay a dividend.
Risks to Consider: VeriFone is still struggling with sluggish revenue growth that it expects to last through 2013. Although the company is moving aggressively to fix its problems, tepid revenue growth could limit shares up side in the near term after a 27% rebound in the last 3 months.
Action to Take --> VeriFone struggled through a challenging 18 months, but its recent investments in new products and markets beginning to bear fruit. In light of the recent decline, shares are trading with a forward P/E (price-to-earnings) ratio of 21 times, directly in line with its 10-year average but a discount to the industry average of 23 times. That makes VeriFone a buy anywhere below $25.
- Michael Vodicka
StreetAuthority.com
StreetAuthority spends over a million dollars on research each year and employs a team of experts across the U.S. and Canada. Before joining, these experts worked as senior analysts for Wall Street firms, financial advisors, investment relations presidents, and business reporters for major newspapers. As a result, they're able to uncover rare, profitable and compelling investing opportunities that you aren't likely to find anywhere else. Their research is presented in simple, easy-to-understand language without the typical Wall Street double talk.
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The Rebound In This Shipping Sector Is Real
In early September, stocks in the long-beleaguered maritime shipping industry started to do something few observers expected them to do anytime soon -- they started to rise in a meaningful way.
The rally from names like DryShips (Nasdaq: DRYS) and Eagle Bulk Shipping (Nasdaq: EGLE) was driven by a meteoric rise in the Baltic Dry Index, which reflects the change in the daily charter rate for dry bulk vessels. The index nearly doubled in value between mid-August and this month, providing a glimmer of hope of decent profits for maritime shippers.
But as is often the case with huge moves from stocks and indices, doubts started to set in about the sustainability of the Baltic Dry Index's new price levels, and these stocks started to wane just as quickly as they'd heated up.
However, the rise from the Baltic Dry Index wasn't the result of a little volatility. A handful of other data indicate the supply/demand balance in the dry bulk shipping sector has finally found a happy medium, making DryShips, Eagle Bulk, FreeSeas (Nasdaq: FREE), Diana Shipping (NYSE: DSX) and a few other names in the group worth a closer long-term look.
The Perfect Storm
To put things in perspective, the Baltic Dry Index advanced from a low of 996 in mid-August to a peak of 2,146 in early October, meaning the going rate to hire a bulk-transport boat more than doubled in a little over a month. It's also the strongest price since around this time in 2011. And those rates were being quoted because that's what shippers were getting -- not just what they were hoping to get.
