The Proficient Investor

Its insanity out there.  Stocks that were juggernauts just a month ago are selling off faster than the Fed-Ex guy could finish a commercial in the 80s.

I’ll talk a little about the Fed rate cuts, but first…what the heck is going on at Google? By the 8% downturn after hours today you’d think Google execs announced they were losing money hand over fist but they actually reported Q4 2007 revenue was  51% higher than the same quarter last year. After adjustments, they earned $4.43 a share. Analysts expected $4.44 a share.

Ok, hold the phone!  Just stop it right there!  Google misses by a penny and everyone jumps ship? Are you kidding me? So you really think that $314k makes a difference to a $1.5 billion company? Really? Heck, sell the damn thing, I’ll just get my shares cheaper.

Let me paint a picture for you. Google is at $564 down from almost $750 in November 2007. It wasn’t a straight line but it’s down nonetheless. If you look at their earnings though, and I hardly call 1 cent a catastrophic miss. Based on growth of 38% in the next year, this stock should have a PE of at least 75. Multiply that by the current EPS and you have a $960 stock.  Dare I say, $1000.00 stock when momentum gets going. Of course you can blame the price action on recession worries and people that made money but forgot to take it off the table panicked on the news Google missed by a penny.  Or maybe it’s the Fed. Yeah, blame them. They don’t know what’s going on anyway right?

Well, lets talk about the Fed. How do the Fed rate cuts apply to you? That’s a trick question.  They don’t apply to you. The federal funds rates that are being cut affect how banks loan money to each other. This isn’t going to affect your mortgage or the price of groceries. Your mortgage rates are tied to the Prime lending rate banks use. Currently its around 6.5% and you can bet that’s not changing much anytime soon. No doubt you’ve been hearing about all this sub-prime business. Sub-prime rates are those that are given to more risky borrowers because the bank has a greater chance of losing money if the borrower defaults on the loan.

It’s this situation, banks not following their own rules designed to protect their bottom line that led to so much trouble. Loans were being given to individuals that had no right to borrow that kind of money and with no real plan to afford it in the first place.

The lesson to learn here is you need to do your research when you buy stocks. I see something like Google drop like this and it looks like a fire sale to me. I say keep driving the price down so I can get it around $200 (I know that’s not going to happen). Then I can make out like a bandit when i hit my $950 target next year.

I do not own stock in Google.

Everywhere you look the market is sagging. Tech bellweather Apple(AAPL) has been just hammered relentlessly from 200 down to 130 bucks a share? Ouch! Talk about a sell-off. The company of course is doing just fine. When you have the killer app that everyone wants, it doesn’t matter what state the economy is in.

If you consider that people still need to get to work and a lot of people commute by public transportation, take a look around a bus station or train station some time. Notice all the white things dangling from people’s ears? Those are iPods, folks. Maybe they are iPhones but does it matter? The point is, gadgets are always going to sell if they appear to be “must haves”. So you see a stock like Apple going on sale big time, what do you do? Stay on the fence, hemming and hawing or do you take a core position to trade around and start making some money?

Here’s another thing. People still need to eat, brush their teeth, wash their various parts, use the toilet etc. That’s when you take a look at a company like Proctor & Gamble (PG). Proctor & Gamble make all those everyday items we all consume like toothpaste and mouthwash, toilet tissue, soap, shampoo.  You name it, they make it. That’s an inflation proof investment.

What else do I look for in times like these? Everyone has to keep their money somewhere and if you take a look at the financial market, there’s one company out there that had much less exposure to the sub-prime market than most. Not only that, but they are rebounding from a pretty hard sell off, gaining over 5 points just this week.  Wells Fargo (WFC) continues to prove they are a great company. Before the split a couple years ago the stock was nearing the $75 a share mark.  I’m just happy I work for such a great company Can you say 401k and company stock? I knew you could.

Well, that’s what I would look for in a situation like this.  As always I’m fully vested because I play the long-term game.  That doesn’t mean you have to.  Everyone should find their preferred way of investing and go for it.  Just keep in mind how to protect your positions or profit from the downside when faced with such a bear market.

I own stock in Apple and Wells Fargo but not Proctor & Gamble.

For a long time on Wall St, the question was who was going to win the dvd by mail war. It was Blockbuster (BBI) v Netflix (NFLX) almost exclusively. Most analysts predicted Blockbuster was going to take Netflix down because they had a “triple play”. So-called because they have traditional brick-and-mortar stores, online dvd delivery and the ability to trade in your dvd at the store for a free rental.

Whoo! Were those analysts ever wrong. Blockbuster hasn’t been able to dig its way out of the 6 foot hole its in. In the last year the stock has gone from the mid 7s to less than half that at $3.01. Still think BBI has legs? Think again.

Netflix on the other hand (which I have been supporting all this time) is dead even over the last year. Sure, it has been a bit of a roller coaster but only because most people don’t understand the business model and can’t think far enough ahead to realize they are way ahead of the curve. While Blockbuster was offering trade ins for DVDs, Netflix was rolling out their instant viewing software (for windows based systems only).

Now along comes Apple and I’m reading the same crap from analysts and the media. “Netflix should worry about Apple”, “Apple takes on the online movie market to beat out Netflix”. You know what? It’s the same crap, different day.

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I can’t make heads or tails of the market lately. Good news seems to be bad for stocks and bad news seems bad…you just can’t win.

Ameritrade reported profits were up and raised their guidance for the year but because of credit worries elsewhere in the market, the stock has taken a hit. Down nearly a dollar in intraday trading, there just doesn’t seem to be anything any of these financial companies can say or do to keep their prices up.

Retail is down, tech is down, financials are down, this is truly a bear market and it’s not going to be easy to find growth to invest in.  I’ve got some Apple at $163 and some in the industry are predicting a drop to $150 but I’m not too worried about it.  A fall to that price just puts the stock on sale for me, which is how I like to buy anyway.

The hardest part of this market is that being on the sidelines isn’t much better because the value of the dollar is so bad, you just can’t earn much staying in cash. I’d rather stay in the stocks I like and get some of them on sale here.

Yesterday I mentioned that Apple was starting to look good. I’m not going to cite the reasons again. The last time I owned Apple, I bought at $180 and sold at $192.

A lot of times, investors look at a stock like Apple and balk because it looks expensive. Granted, over the past couple weeks it’s been hammered down but as I said yesterday you need to have a game plan. I took the $900 dividend from Infospace(INSP) and put it into Apple(AAPL) here at $163 a share.

The MacWorld keynote yesterday by Steve Jobs wasn’t exactly stellar news but even Apple can’t be creating mindblowing devices year in and year out. I think their focus right now is to improve upon their already successful iPhone and iPod lines and they are obviously working hard on their MacBooks which seem to be the flagship of the company right now.

I will say, their new movie rental model is flawed in a major way and I think they will need to reconsider that market to keep in line with what Netflix(NFLX) is doing.

Suffice to say, I like the position right here. We could see a pullback short term but the shorts can’t stay for long and I see major upward trending long term. 6-18 months you sell at $225.

I own shares of Apple but not Netflix. 

Roller coaster doesn’t even begin to describe what’s happening on Wall Street these days. Overall my portfolio is worth half of what it was 2 years ago. A steady downturn in activity all last year failed to produce any of the results I had expected. You had stocks like Apple (AAPL) hitting an all time high and then plummeting 40 some odd points in record time. Bad news from Eddie Lampert’s Sears Holdings (SHLD) can’t keep that stock afloat, the bull, it would appear has left the building.

Now I hate to do stock picks because the way I like to invest means you need to be able to take the pain. What that means is you need to decide at what point you want to invest and then instead of buying all at once, you buy a little bit here, wait for a pullback (the stock to become cheaper) and you buy some more. Don’t confuse this with averaging your price down. If you calculate prices based on earnings and revenue you should know where you are going to sell the stock before you buy it. That way, if the price goes down you can buy more cheaper and then be prepared to sell it on the way up.

I don’t short stocks. There’s two reasons why. First, I’m fairly young still so I do a good amount of trading in my IRA. Mutual funds bore me and there aren’t many ETFs that I really like to follow. Plus, I don’t have to claim any capital gains or losses until I’m ready to pull the money out in about 30 years. The second reason I don’t short stocks is my brokerage account I have with scottrade just doesn’t have much capital. I only have about $1200 locked up in stocks there and that’s really not enough to be able to short with.

So I’ll tell you what I like right now. I like Apple and Intel even though the announcement this morning at MacWorld was less than astounding and I think Apple is missing the mark with their movie rentals. I still think they make some of the best products on the market and even at $169.00 that’s cheap. It’s on sale right now, down from a high of $200 a share. Apple has 72% growth over the next year and trades at 35 times earnings…that’s incredibly cheap. I expect apple to top $225 this year. Intel of course is providing the new processors for the ultra thin laptop Apple just announced and that’s good for business.
Google. Do I really have to explain why you should be owning this stock? In a nutshell, 95% EPS growth over the next year and trading at 38 times earnings. These stocks keep hitting new all time highs…those are always good bets.

EMC. VMWare is doing incredibly well since their IPO and EMC still owns 80% of the company. EMC is the way to play the vmware game.

Bluefly. I don’t know what happened this past holiday season. Bluefly should have doubled but I fear consumers just weren’t spending the money everyone expected them to. Bluefly (BFLY) is now in danger of being de-listed from NASDAQ and the short ratio was at 6 last time I checked. That means it would take 6 days for shorts to cover all their positions. Obviously, the higher that number the better it is for buyers because any activity covering the shorts is going to push the price of the stock higher. A reverse split would keep them from de-listing, I’m thinking something like 1 for 5.

Right now, I’m in a holding pattern. All but about $900 is locked up in stocks and I just have to play the waiting game. It’s painful but I’m used to it.

I own positions in the following stocks mentioned here: Apple, Bluefly, EMC.