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August 10, 2011

Percentages, Not Points

Don’t be duped. Monday, after Standard and Poors downgraded the nation’s debt, for what seems to be highly political reasons instead of financial ones, the Dow Jones Industrial Average declined 634 points. The headlines the next morning in the Wall Street Journal read, “Downgrade Ignites Global Selloff”. Of course, there were similar headlines around the news-scape.

Now if you read these headlines with little to no context, you might be ready to cash in your 401k and bury your money in the back yard. You’d reason, “634 points?!?! The sky must be falling. Better get liquid!” In fact, I know some of your financial advisors have even advised you to move your long-term money to cash. Excuse me but this is really awful advice, especially for your long-term funds.

Context is what is needed. Although a 600+ point drop is significant, it hardly matters. The drop on Monday represented a 5.5% decline. That is not even close to making the top 20 percentage drops in the DJIA’s history. But the headlines would have you believe otherwise. It's percentages that matter, not points. The market, as a rule, goes up and down… daily. From 1926 to 2002, the S&P 500 was up 52% of the trading days and down 46%. There was little change the other 2% of the trading days. Like I said, up and down. Deal with it.

Your asset allocation decisions are important when it comes to managing the volatility in your portfolio. I won’t get into that much in this post except to say, your long-term money should typically be in stocks. Your short-term money should typically be in bonds and cash (treasuries). If you have that squared away, volatile days like these last few are buying opportunities and a chance to make money. Not sell out of misguided fear and lock in unnecessary loses.


Market:

"20 Largest Percentage Losses in DJIA History" by FoxBusiness.com

"The Revenge of the Rating Agencies" by Jeffrey Mann; New York Times


Portfolio:

One year chart of eBay (EBAY) vs. the iShares S&P 500 ETF (IVV)

"Stocks at 'fire sale' prices after bloodbath" by Hibah Yousuf; CNN Money


Life:

CrossFit Sports Series WOD-SUP Queens by CrossFit, Inc

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October 21, 2010

Through The Noise eBay Is Still On Track

eBay, Inc. reported yesterday and the market seems to have like what it heard. The stock is up over 8% day-over-day to $27. Paypal, the company’s online payment platform, continues to shine as its revenues grew 40% over the quarter-to-quarter. However the picture was not all rosey. The company’s main business, dubbed Marketplace, grew only 3%. If CEO John Donahue wants to meet his three year goals of turning this aspect of the business around, he has some work ahead of him.

With that, one quarter should not make or break a company. At least, we’d hope. So I thought I would check to see how eBay is performing compared to where I thought they’d be at this point. You may recall a post a few years back where I did a discounted cash flow analysis on eBay. At the time, the company was trading at about $30. I then said based on my projections of free cash flow, the company was actually worth $60. According to that analysis (here), eBay should have been producing free cash flow somewhere in the $2.2 to $2.7 billion range. Some three and half years later eBay reports free cash flow of $1.9 billion. This includes a one-time tax payment of $207.4 million related to a legal entity restructuring. If we were to add back the $207 million eBay would have a FCF of $2.2 billion.

So it seems my original analysis which had eBay at valued at approximately $60 in 2006 was a pretty decent estimation. The beauty is, eBay is cheaper than it was then, even after an 8% run up, at $27. If Paypal keeps chugging along and Donahue can get Marketplace on track, the analysis I did back in 2006 should remain valid.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares in the companies or funds mentioned in this post at the time of this writing. But positions may change at any time.

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January 05, 2009

"The Third Pig" On Reuters, Yahoo Finance and Others

The Third Pig

Articles that appear on The Third Pig occasionally appear on the Seeking Alpha website and are regularly picked up by the general financial media outlets including Yahoo Finance, Reuters and other financial blogs. I have listed some of the latest entries and other locations they can be found:

Asset Allocation in 2009: Best to Go with the Devil You Know at:
Yahoo Finance: http://finance.yahoo.com/q/h?s=SBUX and http://finance.yahoo.com/q/b?s=BRK-A
Fav.or.it: http://fav.or.it/post/953406/asset-allocation-in-2009-best-to-go-with-the-devil-you-know

Coach: Luxury on the Cheap at:
Guru Focus: http://www.gurufocus.com/forum/read.php?2,42620
Fav.or.it: http://fav.or.it/post/929527/coach-luxury-on-the-cheap

Five Things to Be Thankful for in This Market at:
Reuters: http://www.reuters.com/finance/stocks/marketViews?symbol=COH.N
Yahoo Finance: http://finance.yahoo.com/q/b?s=COH&t=2008-12-15T03:55:28-05:00

GM Bailout Would Be Agony For Taxpayers at:
Yahoo Finance: http://biz.yahoo.com/ic/news/330.html?time=1226885400 

Obamanomics and the Stock Market at:
Stock Shoot: http://stockshoot.com/content/view/6602 

Buffett and Cramer Agree: It’s Time to Buy Stocks at:
AOL Finance in the Headlines area: http://finance.aol.com/related/berkshire-hathaway-inc-cl-b/brk.b/NYS?topic=144012971&tab=3 

Greed, When Others Are Fearful, Is Good at:
Wall Street Oasis: http://www.wallstreetoasis.com/newswire/greed-when-others-are-fearful-is-good

If you would like to share some of the above articles with your friends, family or associates just click any one of the icons below for the various websites including ShareThis, Digg.com and Facebook. Here is to a wonderful 2009 in the market.

Disclosure: none

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January 02, 2009

Best To Go With The Devil You Know

The stock market ended the year of 2008 posting one of its worst annual price performances ever. The Standard & Poor's 500 index dropped 38.5% for the year marking its worst performance since 1937’s 39% drop in the index. In fact it was the first time the index saw a 30% or more drop in price in those 71 years. So if you survived this year, give yourself a pat on the back.

Investors over the past year made many wrong moves, paralyzed by fear, they drove down stock market prices to unreasonable levels. One bright spot is patient investors could invest in stocks very cheaply. Valuation levels had not been at those levels since the early 1980’s. Although the S&P 500 has advanced more than 20% from its low of November 20th, there remain bargains to be had.  

With so many bargains to choose from, some investors may experience paralysis because of greed. Which stock does one pick? In such an instance, it is best to invoke the spirit of Charles Munger, co-chairman of Berkshire Hathaway. In an Outstanding Investor Digest article some years back Munger was quoted as saying:

“For an ordinary individual, the best thing you already have should be your measuring stick. If the new thing isn’t better than what you already know is available then it hasn’t met your threshold. This screens out 99 percent of what you see.”

Although I picked up a few new positions for myself and my clients’ portfolios, in following Munger’s advice I found that the positions already in the portfolios were of solid companies that were similarly beat down as the market. Every nook and crannie of the market was hurt this year. It couldn't be avoided. And the potential of being hurt further is still present. However, when choosing where to allocate funds, sometimes it is best to go with "the devil you know".

Instead of scouring the investment universe for the new thing, I simply averaged down. The following chart marks the return of a few positions from the beginning of the year to the S&P 500’s low on November 20th and then the return to the end of the year from that November date compared to the market’s return.

 

Although as a group the stock of these companies declined to a similar degree as the market, their rebound so far as been nearly 50% greater. Although it is too soon to say, I believe superior companies will bounce back to a greater degree than the average stock. I think this is what we are seeing in the chart above.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares in all the companies mentioned in this post at the time of this writing. But positions may change at any time.

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May 18, 2006

Ebay: A dollar for 50¢?

EbayEbay’s current price has sparked me to consider a few things. First, am I “correct” on eBay? My general thesis on the company is that it is an undervalued market leader. The other question that comes to mind stems from the first one. If I am correct, why am I correct and the market wrong? It certainly isn’t that I possess some supernatural intellect or clairvoyance. (Trust me.) All I know is that I have looked at eBay’s operating performance numbers and to me the numbers just don’t spell 30 bucks per share.

What numbers am I referring to? Well primarily I’m referring to eBay’s free-cash-flow (FCF) figures. Recognizing that there is a plethora of ways to arrive at FCF and keeping in mind that exact numbers give a false sense of preciseness, I estimate that eBay produces about $1.4 billion in FCF. And over the last few years the company has been able to grow those figures at extraordinary rates – by at least 40% and by as much as 90%.

Using the discounted cash flow (DCF) method, I arrived at an estimated intrinsic value for eBay of about $60 per share. Of course, this method of valuation is very sensitive to the assumptions made. To come up with my estimate, I assumed a discount rate of 9% which is my optimistic view of what the market itself will return over the next decade or so. I also assumed that eBay’s FCF growth rate would substantially decrease over the next 10 years - falling from 25% in the early years to 12.5% in the later years. And then I assumed a terminal growth rate of 3%, about the historic rate of inflation. With those factors, all of which I think are reasonable, I came up with an estimated value of $60. So the market must be missing something…possibly. Click chart for larger view.



But what if I’m wrong and the market is correct? Perhaps I’m missing something. One way or another the market is saying that eBay will not be able to perform in the future as it has in the past. The market seems to be saying that some external (or internal) force will do one or a combination of several things. The forces will depress eBay’s margins or retard its sales growth or cause it to have to substantially increase its capital expenditures.

I think one thing the market is saying is that it doesn’t like eBay’s purchase of Skype for $2.6 billion. I agree with the market here. I like the company, I just don’t like the price eBay paid for it. That said I doubt that any failure in Skype will be enough to sink eBay. The market may also be saying that the Google-monster will surely do eBay in. I doubt that pressure from competitors like Google or Yahoo will be significant enough to substantially hurt the company. Not in the long run anyway. And certainly not enough to justify the $30 price tag eBay now sports.

In my own analysis, I assume that eBay’s FCF growth falls off a proverbial cliff and I still came up with a value that is at least twice the current market price. In other words, I think eBay represents the dollar being sold by Mr. Market for 50¢. Yet exploring the reasons Mr. Market is selling eBay so cheaply are worth some thought.

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May 09, 2006

Quick! Google or Ebay?

I had a thought. If I had a (figurative) gun to my head and needed to answer this question...

Whose business moat is larger and more treacherous to cross? Google's paid search and Ebay's online auctions?

...what would my answer be?

I won't tell you what my answer would be (hint: I and my clients own shares of Ebay) but, I think the knee-jerk answer is probably the correct answer in this case.

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About Brick Financial Management, LLC

Blogged by Brick Financial

51 JFK Pkwy, 1st Fl. West
Short Hills, NJ 07078
973-486-9860
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Brick Financial Management, LLC is a Registered Investment Advisor specializing in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure

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