Month: September 2013

When I try to explain the stock market to people with no experience, I always start by telling them that buying a stock is just like buying part of a business. It gives you the opportunity to invest in other people’s ideas, participate in the growth of promising businesses and take advantage of consumer and economic trends. I admit, it is a very rudimentary explanation of how the stock market works, but I don’t want to scare people from the get-go.

This is the way Warren Buffett thinks and invests. You have probably heard of his favorite stock market story about one of his long-term holdings – Coca Cola. Coke became a public company in 1919 at the price of $40 per share. A year later, it was trading at $19 and the IPO buyers were down more than 50%. You can always find a few reasons why it was not a good time to buy it, but if your grandmother bought one share at $40 and re-invested the dividends, she would have had $5 million today. “There is never a perfect time to buy a great business”, Buffett says – “There are always reasons to worry, but if you are right about the business, you will make a lot of money over time”.

It almost sounds too simple, right? Buying a stock is buying a part of a business. The truth is that more often than not, there is a huge disconnect between a company and its stock. Sometimes you will spot a big consumer trend and a business you would love to own, but that does not mean that you have found a sure money maker. The odds are that other people have made the same observation and the stock market might have already discounted the trend.

You are never just buying a piece of a business. Take for example, the retail giant Walmart. If in the early 2000s, you thought that it will expand substantially over the next decade, you would have been absolutely right. Walmart more than doubled its earnings and revenues in the past twelve years. Do you know how much money its investors made? Almost Zero. Its stock practically went side-ways for 12 years. Earnings growth is not the only factor that impacts stock prices. Just as important is the P/E ratio that the market is willing to pay for it.

The outcome of your investment depends on the price you pay for it and on the price other people will be willing to pay for it in the future. There are no guarantees that if one company keeps growing its sales and earnings, its price will continue to appreciate. The market is forward looking and constantly discounts 6 to 12 months into future. When you buy a stock, you are not just buying a piece of business, you are buying the current expectations about the future of this business – sometimes, it pays to buy extremely low expectations – value investors’ approach. Other times it is worth paying for quickly rising expectations – momentum investors’ approach.

Investing is not only about owning part of a business, but also understanding how different catalysts will change people’s perceptions over time.

Most agree that in order for $AAPL to recover some of its glimmer back, it needs to enter and dominate new categories. Yes, the smart phone and the tablet industry has a lot of room to grow. The pie is growing fast enough for Apple to continue to grow even if it losing market share to Android-powered devices. And yes, Apple will probably be an important player in wearable computing. The rumored iWatch will probably be lightning years ahead of Samsung’s first Smartwatch, at least for awhile. The truth is that the iWatch might be too small to make a difference – something like XBOX for Microsoft.

A lot has been said about Apple’s new dividend and buy-back policy. Some say that there is nothing wrong if a company gives money it doesn’t need for growth back to its shareholders. Maybe they are right, maybe they aren’t. In my eyes, it is a testament that Tim Cook and co don’t have enough imagination and vision to run this great company. It is a sign that no one at Apple is thinking different and bold enough. This could be changed.

Apple already has the mind share and the distribution solved. Now, all it needs is new product categories to offer in its stores.

Apple does not need to invent all its products in order to dominate.  It could do as all big and popular fashion brands do: acquire new products or license its name to other cool products. Jony Ive is not the only brilliant designer in the world. There are plenty like him that are doing amazing job.

For example, Michael Kors licenses its trademark to fragrances, cosmetics, eyewear, leather goods, jewelry, watches, coats, footwear, men’s suits, swimwear, furs and ties. Apple should do something similar and be extremely selective in choosing its partners. Jawbone, iRobot, Nike and Tesla are a good place to start.

People that own an iPhone, iPad, iMac would love to own other cool products with the brand Apple – washing machines, headsets, speakers, smart clothes…

Apple should not be viewed only as a technology brand. It is a life style brand.

I don’t have any positions in $AAPL at the time of writing this post.

Pandora Media ($P) announced a secondary offering and it still went up to new all-time closing highs above $25. Its float will increase by 14 million shares, four million of which are sold by insiders.

LinkedIn ($LNKD) raised a billion dollars in a secondary earlier this month. It still made new all-time highs.

Zillow announced a secondary on August 19: 2.5M shares at $82. $Z is trading near $100 today.

In February 2013, Michael Kors priced a humongous secondary offering: 25 million shares at $61. $KORS is trading near $75 today.

Sure, there are plenty of examples of stocks being killed after announcing secondary offerings. The bull market in 2013 has been very forgiving and capable of absorbing secondaries.

On the surface, most secondaries are viewed as negative events for three main reasons:

1) A secondary represents an increase in company’s float, which dilutes current shareholders and potentially could lead to an increase in supply down the road. This is not always the case (the increase in supply) and i will explain why in a bit.
2) It is always priced below the current market price to entice institutions into buying big blocks of shares.
3) Insiders selling is always looked with suspicion.

Secondary offerings are an organized transfer of ownership, often from weak to strong hands. Counter-intuitively, they could be positive if there are enough institutions willing to participate.

Depending on who is selling, secondary offerings help:

1) companies to raise more cash for operating and expanding purposes. The companies are in stronger financial position after the offering. You raise when you can, not when you have to.
2) insiders sell in an organized manner. there is a transfer of ownership from insiders, who would sell on the open market anyway, to institutions, who are more likely to be long-term holders.
3) institutions to accumulate large blocks of stocks they want to own at prices slightly below market. If they had to buy the same number of shares at the open market, it would probably cost them a lot more. Institutional interest is generally considered a positive sign. If a stock runs from 20 to 40 and has a secondary at 35, the event could be considered a stamp of approval; a justification of the current prices in a way.

Remember, the market is designed to fool most of the people most of the time and it is often counter-intuitive.

In no way I am saying that secondaries are always positive events. I am just open-minded to the thesis that sometimes they could be. I am a big believer in the philosophy that “Reaction to news is more important than the news itself”. When I see a stock, making new all-time high after announcing a secondary, I consider that a really good sign.

Positive reaction to what appears to be “bad” news on the surface is bullish. When stocks don’t fall on bad news, good news is usually just around the corner.

At the moment of writing, I don’t own any of the mentioned stocks in this post. I am just sharing my thought process.