The Proficient Investor

Yesterday I sold my position in Wells Fargo (WFC) for about a $600 profit. Why sell now, on the way up? WFC is $7 below the 52 week high it set in September 2007 and I enjoyed the ride from $23 to $29. That’s a $6 gain over just a couple weeks. It might not seem like a lot, but I only held 120 shares. Profit is Profit. Now I can invest that money elsewhere.

I also sold it because I don’t like to be fully vested for too long. You end up missing other worthy plays. Financials are also questionable at best right now because of the housing and credit situations.

I’m sitting on the cash for now, looking for opportunities.

The long awaited re-launch (version 4.0) of the World Stock Exchange is scheduled for August 3rd.

The WSE is a virtual trading platform based in the world of Second Life. Traders can buy and sell stocks of the fictional companies listed in Second Life on the exchange. Fees are only taken when a stock is sold (3%). I’ve been following this development for 2 years now and been heavily involved in one of the companies I have quite a large stake in.

Ford Edelman Designs or FED as it is known on the exchange is run by a soldier in the US Army. He has created some of the funnest games in Second Life and I am currently the largest shareholder. While he has been away serving a tour of duty in Iraq, the reigns have been held by Ashley Wade and he has done a fine job.

I expect good things to come of the exchange as it re-opens and if you are a novice investor, trying your hand at the WSE may provide the confidence you need to trade on the NYSE or AMEX stock exchanges. The currency of the WSE is the World Internet Currency or the Linden (Second Life’s currency). Users open an account at the WSE and then deposit their Lindens or WIC currency to begin trading. Trading can be done online through the website at https://www.wselive.com/ or via the World Stock Exchange in Second Life.

Lindens have an exchange rate with the US Dollar which makes trading stocks in SL fun. You can eventually withdraw your money from the exchange and spend your gains in the virtual world or withdraw them at the current rate for cash.

Trading begins August 3rd.

Wells Fargo Co. announced record $1.8 billion in revenue for the second quarter of 2008 and raised their dividend by 10% putting to rest any fear investors had of the world’s 5th largest bank showing signs of weakness.

I hate to say I told you so…but I did.

“Wells Fargo continued to strengthen its franchise during the second quarter,” said President and CEO John Stumpf. “Earnings per share were 14 cents below that of last year due to $2.3 billion of higher provision expense, including a credit reserve build of $1.5 billion (30 cents per share). We were able to lend more to current customers where we believed it was prudent and properly priced. We grew core deposits while reducing funding costs. We achieved record crosssell results with our retail and commercial customers – a testament to our relationship based strategy and our 160,000 team members who serve our customers. We are open for business and getting lots of it. We also continued to benefit from opportunities in this environment to gain new business and customers through selective acquisitions. We maintained a strong balance sheet and, for the 21st consecutive year, increased our dividend. We’re still affected by the weak economy, but we believe we’re one of the best positioned in financial services to grow through this adversity and to build an even stronger company for our team members, customers, communities and shareholders.”

WFC looked to be bottoming out to this investor and I promptly snatched up 200 shares at 23.70 two weeks ago. Since then the stock slid to an all time low of $20.40 but that corrected today as the stock was up $4+ in intraday trading. I see no reason for any slowdown and when companies increase their dividend that’s a good sign they believe things will continue to strengthen.

I’d like to see WFC at $30 before the end of summer if the momentum can keep up, but even then long term it’s fairly priced at $60. Two years ago the company split the stock when it was in the mid $70s and it’s been steadily declining mainly due to the housing crisis and credit crunch that has destroyed smaller banks. This is the only financial company I own in my portfolio.

In these troubled times, it can be a daunting task trying to sort through the thousands of stocks trying to find bargains, that is to say those stocks that appear cheap compared to their past performance and future outlook.

I try not to concentrate too much on where a stock has been with exception to the 52 week highs and lows. I use these as benchmarks to determine future price points and earnings tracking.

Much of my investment strategy has to do with earnings and funamentals but not always. Momentum stocks can be just as good if you understand the catalyst involved and know when to get in and out. A major part of understanding where a stock can or should be is understanding the sector, the factors that went into getting the stock where it is now and figuring out where it can go based on future outlook.

With most stocks, you can do this by looking at earnings over the next year. I trade on a 6-18 month timeline because figuring out the numbers works best for that time period. You can trade much shorter timelines if you know the factors that make up the momentum.

Take a look at Marvel Entertainment (MVL). I traded this one earlier in the year because despite all the other people saying the numbers were baked in for Iron Man, nobody had expected the movie to do as well as it had. Except me, of course. I figured it was going to be a big earner compared to The Hulk, but even that movie has done well. Tie that in with all the new comics and other franchise opportunities the success of Iron Man has created and you could see where it was going to go. Read my previous articles to learn my trading strategy earlier in the year.

Marvel is nearly back to the same levels it was at in May but the 52 week low is still $21 and change. Volume is currently only around 1 million shares over a 10 day average, so the steady decline in price makes sense. When a stock like this doesn’t trade a lot of shares the price can be manipulated much easier. A wall of selling and short orders will drive the price down fast.

Since earnings look flat over the next year, you can’t use them to predict price. Revenue on the other hand looks to increase nearly $100 million over the next year. With projects like Thor, Iron Man 2 and Captain America in the works, Marvel is going to be a force to contend with at the box office for the next few years.

I don’t think Marvel is doing going down for now and the next earnings call is August 4, 2008 so I would wait to do anything until afterward. I expect the news will be good because of the summer box office, but nothing else is happening for the company until next summer which is why the stock has had the steady decline over the past few months.

I’ll keep an eye on this one and let you know what I think after the call in August.

If you have a properly diversified portfolio, you should have at least one financial institution in your list. If you don’t have any, you might want to take a second look at where your money is invested.

One thing I like about the recent turn of events in financials is the bargain you can find right now. There are some you want to stay away from of course but the bigger players are worth taking a look at. Companies like Bank of America(BAC) and Wells Fargo(WFC) are large enough to weather the really bad storms while others just may sink under the weight of their own debts.

Wells Fargo (whom I happen work for) is at a 52 week low at $23.23 in intraday trading. Two years ago, the stock split from the $70’s which dropped the price down to $36 roughly and since most financials trade in tandem, the stock is experiencing the same downgrades and downtrends others are. Does this spell doom for the company? Of course not. What’s happening is an overreaction by the market to the housing and credit crises currently going on and really, it’s overdue.

For a long time after the Silicon Valley bubble burst, everyone was looking for the next boom. In technology, the “web 2.0″ explosion could be seen as a kind of bubble, but VCs aren’t investing in phantom businesses anymore. Housing, it seems became the next bubble. Even as businesses in Silicon Valley began to fold, housing prices continued to rise. In some places (like where I live) prices still seem to have been unaffected. The mean price for a house in my area is $580k for a 2 bedroom 1 bath, 1200 sq ft. single story house. Add on another story and another $100k.

Wells Fargo, in its wisdom had only minor exposure to the sub-prime market that has taken out behemoths like Bear-Stearns. However, since these sector stocks all trade together, earnings can only play into a portion of the outlook. You have to dig deeper than earnings to understand why you might want to invest your money here.

WFC is looking at 13% growth through 2009 and a current PE of only 10. If you base your position on earnings alone, this stock should be at $60. That’s nearly triple the price currently. I try to look at an 18 month timeline because downtrends like this can take time to recover especially in this kind of market. I like the potential here and given enough interest (average volume is near 50k shares over a 10 day period) it could turn into a major momentum play.

Comparing this to Bank of America Corp. which according to earnings estimates over 2009 has 48% growth and also a current PE of 10. and you get some pretty unrealistic numbers for price targets. Based on earnings alone over next year, the mark is $170 a share. This leads me to believe most analysts are overestimating BACs profit potential and this stock hasn’t been over $55 in the last 3 years.

Taking that into consideration, sure, you could bank a double off BAC. They’re both about the same price and they both have as much potential to double or triple in value from here, but pick one or the other. You don’t want your portfolio to be overweight in any one sector.

I put 40% of my 401k each month into WFC and my company matches dollar for dollar so not only do I get the stock cheap, I get half of it for free. You can’t beat that!