There Are No Other Stocks. Only Apple And Facebook.

December 19, 2012

 

Does this guy look like he had your best interests at heart?

 

At least that’s what you’d think if you only glanced at the financial news, which is why it’s important to remember the wisdom of the old axiom that all news is biased. That doesn’t necessarily mean that said news is distorted or inaccurate. Often, it just means that the very prominence of the story is out of proportion to its importance.

Apple loses 1% in an afternoon, and it’ll lead CNBC’s top-of-the-hour. Facebook announces a new privacy policy, which doesn’t even have anything to do with finances, same thing. One of the 5000 other stocks that trade on the New York Stock Exchange or NASDAQ does something significant, and the arbiters of news don’t care enough to tell you. If Mac-Gray Corporation (a commercial laundry company that puts washers and dryers in apartment buildings) raises its dividend, or Ralcorp (a private-brand food manufacturer) sells itself to ConAgra, it’s difficult to find mention of such.

Folks, this is where the value lies. In the part of the investing iceberg that’s under the surface. You can buy a 100-lot of Apple stock, which will cost $53,390 as of this writing, and eat your fingernails down to the cuticles while being reminded daily of its fluctuations. Do you really want to make an outlay that big to invest in a stock that has plenty of room to fall?

Contrast Apple with Yamana Gold, a Canadian company that mines in Mexico and South America and that has been trading on the NYSE since just a few months after its 2003 founding. The stock reached its all-time zenith of $20 a share last month, from which it’s since lost about 1/7 of its value. Yamana Gold might not be as famous nor as wealthy as Apple – the latter’s market cap is 39 times the former’s – but both companies are NYSE members in good standing, with no pending sanctions. Both are pretty profitable, too. Care to guess which has the higher profit margins?

We wouldn’t ask if we didn’t know the answer. Yamana Gold increased its revenue by almost 45% in 2010, and by a similar amount the following year. Profits have more than kept pace, representing almost a quarter of revenues in the last fiscal year.

At this point, both skeptics and pessimists look for reasons not to invest in such a company. Here are some likely objections, complete with rebuttals.

Yamana Gold makes only one product. Apple is diverse.

Yes, but this isn’t a binary world where you have to invest in one company or the other. You can buy Yamana Gold without respect to what Apple’s doing. This reinforces the point we made in the opening paragraph – stop letting the overexposed news darlings affect your decisions.

Yamana Gold’s doing well just because gold prices are rising.

Maybe, but so what? And are gold prices poised to fall? Bullion and Yamana Gold have indeed moved largely in lockstep for the last 5 years…well, actually the last 4 years. (Like most businesses, Yamana wasn’t profitable from its inception.)

Rationalization is one thing, refusing to see the potential for a good investment is something else. Along with its healthy profit numbers, both static and dynamic, Yamana Gold has also enjoyed a consistent arithmetic increase in its retained earnings – one of the most underappreciated items in a company’s balance sheet. Retained earnings have gone from $400K to $800K to $1.2M in consecutive years.

This from a company that already pays a healthy dividend of 26¢ a share. Remember, profits have to go in one of 2 places – to the shareholders (dividends), or back in the company (retained earnings). From an investor’s standpoint, which is better is largely a function of what your immediate and long-term goals are. Benjamin Graham and Warren Buffett would have you believe that dividends are the greatest invention ever, a cash payment made to you just for being smart enough to invest in a company whose large(r) shareholders insisted on voting themselves such a piece of the action.

From the other perspective, big retained earnings tell you that management is “plowing the profits back into the company”, which can be awful if the company is an unsustainable or wounded loser (see Groupon, Hewlett-Packard), but promising if the company has a history of profitability.

Yamana Gold is trading at close to its all-time high. Isn’t that a red flag?

Yes, but the company is only 8 years old. It’s a lot more likely to be reaching an absolute peak than is, say, U.S. Steel.

So yeah, invest in Yamana Gold. We are.

But Yamana Gold isn’t the focus here. Inconspicuity is. There are hundreds upon hundreds of companies that make suitable investments, hitting at least most of the criteria you want in something you plan to put your money in:

  • Consistent growth
  • Consistent profitability
  • Low price
  • Sustainable business model

There are secondary concerns too (moat, natural competitive advantage, etc.) but those are the main ones. Looking for an unheralded company whose recent history exhibits all those traits takes time, but it can well be worth it. Or you can just hold onto your position in Vanguard’s Institutional Index mutual fund and wonder why your money isn’t showing any significant gains. Your call. We’re not recommending you take unjustifiable risks, merely that you take intelligent ones. Big difference. And if this still seems overwhelming, or too condensed for you to really understand it, get our e-book: The Unglamorous Secret to Riches. It’s essentially this post, expanded and detailed for the neophyte but ambitious investor.

Filed Under: Investments Tagged With: , ,

Everyone Lies

November 9, 2012

 

Don’t count your chickens before they come home to roost, or something

 

Because there just aren’t enough stories about Apple as an investment, we’re adding our own. Why not? Apple is to personal finance as Tim Tebow is to ESPN First Take. Even if nothing of note is happening with the subject at hand, we still need to not only talk about it, but do so until the readers/viewers weep and beg us to discuss any other topic.

You’re going to have to wait a couple more days. In the last few months Apple has gone from in danger of passing ExxonMobil to become the biggest corporation on Earth, to passing ExxonMobil, to Apple’s stock price setting an acme, to it losing 10% off that high and therefore still being a topic of concern. You know, because no stock in the history of the world has ever reached its lifetime peak and then fallen 10%. Only Apple. Groundbreaking as usual.

A couple of weeks ago USA Today used an effective gimmick for a) attracting readers and b) continuing to give Apple undue attention: the misleading headline. Even better, USA Today posed the headline as a question so that no one could accuse them of sensationalism.

Do too many people own too much Apple stock?

Which not only has less zing than

Too many own too much Apple stock

But isn’t even news. Heck, it isn’t even research. The writer, Matt Krantz (subject of a recent post), starts with a conclusion and works his way back to the premises. Which is what journalists all too often do.

Sparing you from Mr. Krantz’s breezy introduction, we get to the meat of his “argument” a few paragraphs in. (This isn’t an inverted pyramid, it’s a pyramid that’s been ransacked and left to rubble.)

(I)nvestors have found that zeroing in on this one company is their ticket to a big Wall Street score. The stock has been a winner despite its recent decline, which briefly pushed it into a 10% correction. At its close of $635.85 Tuesday, it’s still up more than 50% this year, which compared with the 15% gain in the broad Standard & Poor’s 500 index makes it a runaway winner.

Get rich from a single stock? Without having bought it before everyone else did? Sure, sounds at least as solid a strategy as playing blackjack is. Diversity is overrated, anyway. Here’s the next fanciful line:

“I don’t want to diversify that much when I have one stock doing just fine,” says Matt Loud, a 28-year-old security worker in Bellingham, Wash., who has upwards of 38% of his retirement accounts in Apple.

We were going to track down Mr. Loud and ask him if what he said is true. Failing that, we’d find Mr. Krantz and ask him how he just slipped that into his story without asking Mr. Loud how hard a surface the delivering doctor dropped his head on. Fortunately, Twitter did the work for us.

Here’s a Tweet from @MatLoud to @MattKrantz dated October 2 (before the story ran, but whatever):

@mattkrantz apple plays a key role in my investments but I don’t have a substantial amount of outright shares.

So what does the USA Today quote even mean? How can you have 38% of your retirement savings in a company’s stock but “(not) have a substantial amount of (its) outright shares”?

Using Aristotelian logic, the only possibility is that Mr. Loud was referring to Apple stock in absolute terms, rather than relative ones, in the tweet. A standard lot of Apple stock is 100 shares, which would be worth $63,585. That’s 38% of $167,328, which would be a snappy nest egg for a 28-year-old unskilled worker with a disjointed Twitter account.

The other possibility is that Mr. Loud made the numbers up and/or doesn’t know what he’s talking about, and a journalist with a deadline and a conclusion needed something to flesh out his story.

Loud is part of a crowd of investors who have become infatuated owners of Apple — and richly rewarded as a result.

Then why wouldn’t you tell us how much he bought his stock for? Sounds like an important point, doesn’t it? Is he dollar-cost averaging? Did someone will him the stock? Did he buy it at its 2002 bottom? No, none of this is important.

Personal finance is useless unless you quantify. It’s not “I feel pretty good about my 401(k) balance.” It’s “I’ve got $145,342.99 in there, split between Vanguard’s Admiral Treasury Money Market Fund and its 500 Index Admiral Shares Fund. I contribute $1,950 monthly and my employer matches it.” If you don’t quantify, you don’t have any business investing.

Imagine Al Michaels telling us, “It seems like it’s been a lot of games since Drew Brees didn’t throw a touchdown pass.” Or Paul Ryan saying, “Our national deficit sure is big.”

It gets much worse. The author interviews a 35-year-old San Francisco housewife who claims she first bought Apple in 2007 (it ranged from $85 to $200 that year) and now holds ¾ of her portfolio in it. This is assuming she’s telling the truth. Later in the story she says she doesn’t like the new 9-pin connector, and what that has to do with investing, rather than consuming, we’re not sure.

The same housewife “worries…how much higher can it go”, then contradicts that worry by claiming that if it hits $750, she’ll sell. And will then have at least 78% of her portfolio in cash, assuming her other investments stay constant.

There’s a similarly depressing story about a retired soldier who has “nearly 40%” of his portfolio in Apple.

At Control Your Cash, we treat journalists with slightly less disdain than we do pederastic college football coaches. Check your sources? Not when there’s popular folklore to reinforce. We don’t believe that any of the interview subjects indeed have the listed percentages of their retirement savings in Apple, because we doubt the interview subjects even know what buttons on the calculator to press to divide their Apple holdings by their total holdings, let alone know how much Apple they hold.

The lies don’t stop there, either:

Nearly 17% of all individual investors own Apple shares

According to SigFig, a site Mr. Krantz contacted for his story.
Really? Every 6th individual investor in the country holds AAPL?

From Apple’s latest 10-K, and if you don’t know what a 10-K is, just buy our book already:

As of October 14, 2011, there were 28,543 shareholders of record.

Which would mean that there are only about 168,000 individual investors in the country. Also from the 10-K,

929,409,000 shares of Common Stock Issued and Outstanding as of October 14, 2011

Okay, now we’re the ones playing with facts. There are more than 28,543 individuals who own Apple. It’s just that most people own their shares via brokerage accounts. As far as Apple knows, your shares are under the name “Morgan Stanley” or “Charles Schwab”, not “Jane Doe”. As are your neighbors. It’s impossible to tell exactly how many people own Apple at a given time.

But we can estimate, and we can start by comparing apples to apples. Microsoft has 128,992 shareholders of record.  Alcoa has 319,000. Exxon Mobil has 486,416. Apple isn’t America’s most widely held stock, or anything close to that.

We could pick apart more of this story, but that’s not the point. The point is –
Alright, one more folkloric quote:

Apple investors, on average, have nearly 17% of their portfolios riding on that one stock.

That’s either impossible, or it includes the Apple directors and officers who have enough of the stock that they’ll be rich no matter what. (We’re guessing SigFig didn’t interview them.) Commonplace, you-and-me investors don’t have anywhere near 17% of their holdings in Apple. And if they did, the examples cited in the story wouldn’t be remarkable.

Alright, we’re back. The point is that if you read the financial news, even from a trusted outlet, even from the nation’s biggest newspaper, be skeptical. Nowhere near 1/6 of individual investors have a piece of Apple. No one who has ¾ of her money in Apple knows anything about anything, especially if she’s a dilettante with no coherent investing strategy.

And to answer the author’s rhetorical query? No, not too many people own too much Apple stock. Not even close. After 3 decades, the stock finally started paying a dividend, which will reduce liquidity. It’s trading at less than 15 times earnings, which is not only less than the S&P 500 average but hardly indicative of a bubble that’s reached maximum surface tension.

Would we buy it? No, because the $63,585 initial investment is a little too much for us to commit to when there are other investments available. Doesn’t mean you shouldn’t bite, though. Nor does it mean you shouldn’t invest in a mutual fund that prominently features Apple. Like PowerShares QQQ Trust, which is comprised 20% of Apple and is up 19% this year.

Question everything. Think about whether a quantitative claim makes any sense. And don’t take investment advice from 20-something security guards, impulsive housewives, nor the journalists who indulge them.

Filed Under: Bad Examples, Finance, Investments Tagged With: , , ,

New Kid On The Block. Or In Town. Whatever.

October 24, 2012

Least apt company spokesman ever

 

If you’ve paid even scant attention to the financial news in the last few weeks, all you’ve heard about is QUANTITATIVE EASING this and APPLE STOCK MOVEMENT that. Meanwhile the Dow switched out a component, something it does less than annually on average, and it barely made a sound.

At the risk of insulting our readers who already know this, the Dow Jones Industrial Average is nothing more than the share prices of 30 particular major stocks, added together and multiplied by a constant. The 30 companies represented aren’t precisely the 30 largest in the nation, but they’re close enough. When Dow Jones & Company determine that a company is no longer fit or worthy to comprise part of the DJIA, that company gets booted and another one replaces it.

Recent companies to get demoted from the DJIA include taxpayer charity cases American International Group and General Motors. The most recent company to fall off the index had a legitimate extenuating circumstance, however.

Kraft Foods replaced AIG 4 years ago. Earlier this year Kraft, maker of everything from Jell-O to Miracle Whip to Maxwell House coffee, announced that it would be splitting itself in two. To summarize and greatly simplify the restructuring, the international unit is now called Mondelez. The American grocery business maintains the Kraft name. Both companies now trade on NASDAQ.

Which left a vacancy, to be filled by UnitedHealth. (Yes, Microsoft Word, we did spell it correctly. It’s not our fault that medial capitals are unavoidable these days.) UnitedHealth is a managed-care company out of Minneapolis, founded 35 years ago. By revenue it’s the 22nd-biggest public company in the United States, almost twice the size of the formerly 50th-place Kraft. By profit, UnitedHealth is 29th (the erstwhile Kraft was 43rd.)

Why a boring HMO parent and not something cool like Apple? The chairman of the index committee says that technology stocks are “well-represented” already. He might have a point – there’s IBM, Microsoft, Cisco, and maybe you can consider AT&T and Verizon to be technological. Even the beleaguered Hewlett-Packard, whose stock is at an inflation-adjusted 20-year low, remains part of the Dow.

What does this mean for the ordinary investor? (That’s you, Sweet Boy or Babycakes.) Well, among other things it means that certain stock funds that mirror the Dow now have to have a position in UnitedHealth. But UnitedHealth is a mammoth corporation that said funds probably already had a piece of anyway. UnitedHealth has gained about 10% since it joined the Dow last month, but as we all know, or should know, a 10% change in price over so brief a period means almost nothing. UnitedHealth has been aggressive since joining the Dow, recently spending $5 billion to buy the largest health insurer in Brazil.

Which you can interpret as a tiny bet on Mitt Romney winning the presidency and, if we’re to believe his campaign promises, proposing to have Congress repeal ObamaCare. Or you can interpret it as a bet on President Obama being reelected, which would mean that American managed health care companies are going to need to expand into foreign markets as socialism does to their industry what it’s done to every industry it’s ever touched.

UnitedHealth went public in 1990 and enjoyed the kind of steady, constant growth that most prudent executives would love to see their companies emulate. The stock topped out in late 2005, lost 2/3 of its value by 2009, and has since rebounded to near that previous high. UNH trades at about 11½ times earnings, which is slightly less than contemporary Cardinal Health (13). The “target estimate” for UNH’s stock price is a 20% increase next year, but then the “target girlfriend” for your average World of Warcraft player is something more grandiose than what reality might offer up.

Net income for UNH has increased from year to year, and the company currently boasts a 5% profit margin. Cardinal Health’s is 1%. Retained earnings are high and increasing, albeit not at a tremendous rate – certainly not as fast as revenues and profits. The company has no treasury stock to speak of. On balance, taken together those are slightly positive signs for investors looking to buy and hold.

But you’re not going to buy UnitedHealth stock anyway, are you? No, you’re going to keep funding your 401(k) and electing to receive the employer match if yours offers it. That’s fine, too. UnitedHealth’s biggest single shareholder is Fidelity Investments, which owns 7½% of the company. That’s $4.4 billion worth of UnitedHealth, which is an awful lot to be distributing among Fidelity’s various funds. And among those, Fidelity’s Low-Priced Stock Fund holds the most – about 30% of Fidelity’s UnitedHealth holdings. UnitedHealth is also the biggest component of said fund, which is a slightly different superlative. And, the Low-Priced Stock Fund is up 26% from a year ago. It’s doubled since 2009 – just like the stock market itself. Will investing in a fund that predominantly features UnitedHealth make you rich? Probably not. Becoming one of UnitedHealth’s approximately 16,000 shareholders of record might.

Filed Under: Investments, Making Smart Choices Tagged With: , , ,
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