Some Big Winners and Big Losers in My Portfolio


I’ve had some spectacular winners and equally spectacular losers in my personal portfolio this year as we wrap up the final couple of weeks of 2014.  Among my big winners were restaurant stocks such as BJ’s Restaurants (BJRI) and Texas Roadhouse (TXRH).  Intel (INTC) and Norwegian Cruise Lines (NCLH) also did very well.  Finally, a long-term holding of mine, Home Depot, has done very well over the last few years, rising from the mid-thirties to almost $100 per share at this point.  My losers, including Oasis Petroleum (OAS), Enesco (ESV), and Greenbrier (GBX), have been weak mainly due to the recent weakness in the oil industry.

I’ve always liked restaurants stocks because they fit with my strategy of buying stock in companies that grow and expand.  It is easy to tell how much room for growth a restaurant has.  You just see where they are in the country or in the world.  If they are already on every corner, you know their growth prospects are limited and it is probably time to sell (unless you are just holding for steady income).  If they are only in about half of the country like BJ’s is (I’ve never actually been able to go to one of their restaurants because there are none around here), you know they have room to expand.  Likewise, while there are a lot of Texas Roadhouse Restaurants in some parts of the country, they aren’t everywhere.  Good restaurant stocks will see earnings grow years after year as they add restaurants and improve quality and service, such that more people go to existing restaurants.  You can look at the earnings growth rate to get an idea of the sort of return you can get since normally, over long periods of time, the stock price will roughly follow the earnings growth rate (as they will for any stocks).

I’d worried about buying Intel since it once was once the only real player in the processor market, but then AMD and others were able to move into that market successfully and take market share.  People are also moving away from computers into tablets and smartphones, which were not Intel’s original markets and it wasn’t clear if they would be able sucessfully enter these markets and have a place in this post-PC world.   There is always a danger of buying into a leader in a market that is vanishing – just ask those invested in buggy whip makers.  Value Line, a publication I use a lot in my stock picking, however, gave them good marks for Timeliness(TM) and earnings growth, so I went ahead and bought in.  They have done very well so far, up about 47% since I bought them about a year ago, so they are obviously becoming a player in the new mobile computing world.  Sometimes a great new growth stock is an old household name that just reinvent itself.

Norwegian Cruise Lines is a newer addition that I bought also as a Value Line recommendation.  They have been on fire over the last few months and my position is up over 25% in less than a year.  It appears that people are having some more money to spend since things like cruise lines, hotels, and restaurants are doing well.  I look at the long-term, however, and plan to hold on through future good and bad economies so long as the fundamentals of the companies remain the same and they have prospects to grow.  With a cruise line, that means adding more ships and more ports and cruises.  Norwegian is doing just this and looks like they can become a bigger entity in the cruise ship market.  Perhaps the large number of people currently retiring will also be a new source of revenue.  It is always been a good idea to buy what the babby Boomers are needing.

Oil has not been kind to me, but that is really my fault.  I still have a profit on Greenbrier, which makes rail cars and has benefitted greatly by the oil boom since one of their main products is tanker cars.  I actually still have a small profit there since I bought back before the big move up was completed, but that profit has declined mightily as the stock has fallen from near $80 per share to near $50.  Enesco rents deep water oil drilling rigs.  I have about a 45% loss on that position, reminding me of the losses I took the last time I invested in drilling rigs with Diamond Offshore.  That was right before Transocean and BP put a big hole in the bottom of the ocean and caused an oil leak that lasted for months, devastating the gulf coats tourist industry for a period.  Oasis petroleum, a more direct oil producer, has also done poorly, dropping to the point where I thought they couldn’t drop anyore when they were in the high $20’s, and then falling into the mid-teens last week.  That is why trying to buy a stock on the decline, called “catching a falling knife,” is so difficult.  Things go a lot lower than you think they will.  That position is down about 70% for me since I bought whent hey qwere up in the $50’s.

With all of my losers, I think I’ll probably stay invested after reevaluating the fundamentals of the companies.  There is no reason to sell just because a stock has declined in price – that’s closing the barn door after the horses have been stolen.  I also think that on a long-term basis oil will do well since there is no way to replace it for making plastics and a lot of other important products, not to mention it being the only available compact source of energy that can be easily used in passenger cars and trucks.  Plugging in may seem nice when you commute 10 miles to work and back each day and are then able to plug ion again, but there is nothing like gasoline or diesel when you need to drive all day or are travelling to a remote area where you can’t find a wall outlet.  (Note also that you actually use more energy per mile driven using an electric car than a gas car if you include all of the losses in making the electricity, transporting it to your house, and getting it into the car battery.)  The lesson here, however, is to be careful of buying into an industry after they have already had a few years of great growth.  Every industry gets overbought and needs to contract as some point even if long-term there is ample room for growth.  I’m not a fan of market timing, but still there are times when things are really overbought or oversold where you should just stay on the sidelines for a while and wait for a better entry point.  This was one of those times.

Overall it has been a good year because my winning stock have far outpaced my losing stocks.  That is the beauty of investing in individual stocks – your gains are limitless, while your losses are limited to 100%, so a couple of big winners can make up for several big losers.  It takes time, however, for really big gains (e.g., gains of 1000% or more) to be made.  I’ve held Home Depot stock for over 20 years, including during a period when the stock went nowhere for more than a decade.  I bought in at various points between $40 and $30 per share, so I’ve now made about a 250% gain.  Over 20 years, that is an annualized return of about 10%, but most of that gain came in the last few years.  This is why long-term investing is more effective than moving in and out stocks – you reduce your risk by allowing a long time for things to happen.  It is easier to spot companies that will do well over a long period of time than find stocks whose price will increase over a short period of time.  You can judge the long-term prospects by looking at the fundamentals of the business, while the short-term price movements are due to all sorts of seemingly random factors.  Investing is long-term.  Gambling is short-term.
Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Some Big Tech Companies Are Looking Strong


SmallIvy_1x1Dear SmallIvy,

Love your website for small and beginners. Are you planning on investing in Alibaba? I have about 100,000 and would like to get in on Baba. what are your thoughts? Also yahoo who has 24% in BABA. would you also buy some yahoo? I don’t know how many shares to buy at IPO but don’t want to buy to few as you mentioned in one of your articles. Thank you so much for your time and knowledge you are sharing with us!

Mary

Dear Mary,

Thank you for the kind words and for reading the The Small Investor blog.

I know that IPOs are exciting, especially since the 1990’s when we saw internet start-ups shoot through the roof.  That type of speculation, however, doesn’t fit the investing style I recommend.  First of all, with all of the hype and excitement, it is unlikely you’d be able to get a good price for the stock.  While stocks like pets.com went up dramatically during their IPO days, they also fell dramatically once the insiders were able to sell their restricted shares.  I would love to get shares of an IPO at the opening price, but not at the price of the second or later trades since it is very likely that I would be paying way too much.  I would rather wait for the fall from grace and then buy some shares if the company does have sound fundamentals.  Think about buying Amazon in late 2000.

Another reason I would not invest at this time is that I have no history from which to develop an opinion on how Alibaba will do.  I don’t know if their management team knows what they’re doing.  I don’t have any record of earnings and earnings growth.  I really don’t even know much about the markets they’re in.  I like to be able to have enough information to minimize the risk of a bad management team or a bad product.  That requires some history as a public company and the release of earnings over a few years.

Also note that since they are operating in parts of the world where the government could swoop in and nationalize them on a whim, there is a political risk as well.  I try to stay away from situations involving politics since that is very unpredictable.  You need to know who the favorites are of the government officials in power.

Now on the amount you’re talking about investing.  If you have several million dollars invested elsewhere, putting $100,000 on a single, unproven company might be justified.  It is just your gambling money that may pay off, but no great harm done if it vaporizes.  If that is most of the money you have, however, it is way to big a risk unless you are the CEO of Alibaba and therefore have a great deal of control over the company.  Even then it is risky and you would be better served spreading your money out into other companies.

Regards,

SmallIvy

 
Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

What is a Blue Chip Stock?



Blue chip stocks are large companies that dominate the industry they are in. These are household names that are in virtually every mutual fund and portfolio. International Business Machines (IBM) has the nickname “Big Blue” since it used to be one of the biggest and most owned company in the world.

Most blue chip stocks have been around for many, many years. These are companies like Coca-Cola, Home Depot, General Electric, Exxon, and Microsoft that have been through many business cycles and used each downturn to take business away from rivals and come out a stronger, larger company. They tend to have thousands of employees and be in several different markets.

Probably the most famous list of blue chip companies is the Dow Jones Industrial Average, or DJIA, which contains the largest and most influential industrial companies. The idea behind the DJIA is that where the DJIA goes, so goes the economy since the most important companies in the economy are in the DJIA. There are also blue chip companies in the Dow Jones Transportation Index and the Dow Jones Utilities Index. Dow theory says that if the Transports and the Industrials are either rising (in an uptrend) or falling (in a downtrend), then it is a true trend. If they are mixed – one going up while the other goes down – then it is not a true trend.

The easiest way to spot a blue chip is just to look for the dominant companies that you know. Blue chip stocks are the companies like McDonald’s that a school child would choose in a stock picking game because they have been heavily advertised to by them and they know their products well. Most blue chip companies are also probably companies you’ve grown up with, although the internet has caused some blue chips to be developed very rapidly. For example, Amazon did not exist before 1994, yet by 2000 it was a household name and was dominating the selling of virtually everything. Google is another example that grew very big very fast.

Blue chip companies are sometimes good choices for growth – some large companies do very well over certain periods of time, but generally they are purchased more for stability than for growth. Many also pay good dividends, and grow their dividends regularly, so they are a good way to generate the income needed once you begin using your portfolio to pay for current expenses. The reason they are not as good for growth as small companies is that they are already so large that it is difficult for them to do things like double profits, which is what is needed to double their share price.

Follow on Twitter to get news about new articles. @SmallIvy_SI. Email me at VTSIOriginal@yahoo.com or leave a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

BJ’s Restaurants (BJRI) Takes a Jump


BJ’s Restaurants, Inc. (BJRI) took a jump Friday as earnings came in better than expected.  The shares were up more than $4 per share, to almost $35 per share.  This is nice to see because I have quite a few shares of BJ’s scattered between my regular and retirement accounts.  I have also been planning to write covered calls on some of the shares, but the price has been too low.  I may take advantage fo this jump to write some calls on Monday.  I could probably sell the August $35s for $0.80 per option, or $800 for 1000 shares.  That would be a return of $800/$35,000 = 2.3% for the month, or about a 27% annualized return.  Then again, I may just sit pat since I usually find I do better if I stay long than if I write covered calls.

BJ’s is one of my longterm, core holdings, despite it not getting very much love until Friday.  Even after the jump, one columnist on Motley Fool didn’t think much of the move.  The reason that I like BJ’s is that they have a great business that has been successful at increasing earnings, plus they have room to expand.  I therefore plan to hold it both in good times when all of the newspapers and investing sites are recommending it and during the down times when everyone is panning it.  I don’t know when it may make a big jump like it did Friday, so trying to jump in and out of the stock would be very risky.

During down times I accumulate more shares.  I have faith in the business, so when the shares drop and become inexpensive, I buy more.  I may sell a few shares, or write covered calls on some of the shares I hold, if the price shoots up to the point where it is expensive relative to expected earnings.  I still keep a core position, however.

So would I ever sell?  I follow the annual reports and watch the commentaries in Value Line Investment Survey, which come out about every three months for BJ’s.  I don’t worry about short-term impacts like dips in the economy or small missteps.  I see what management and Value Line thinks of the longterm prospects.  As long as it looks like the company will continue to grow, I’ll hold on.  If it looks like they have grown about as much as they will, or if it looks like a new management team is changing the fundamentals of how the company is run, I’ll probably sell out.  Otherwise, I’ll stay in, taking out money here and there.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Auto Parts Industry Looking Up


Sometimes I get an issue of Value Line and one of the industrial sectors strikes me because there are a lot of companies in that industry that have high Timeliness ratings.  (For those who don’t know, Value Line is a company that provides stock research, including the Value Line Investment Survey, which is an invaluable tool for stock picking.  Timeliness is a proprietary rating system, where the 100 companies they expect to do the best in the next year are given a 1 for Timeliness.)  I like to get the paper version of Value Line, rather than just screen stocks with the online version, because it allows me to see trends like this, as well as flip through pages and look for stocks that have prices that follow a certain pattern — they increase in price in a steady fashion.

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An industry that struck me this month is the auto parts industry. There were several companies in that sector with promising Timeliness rankings, including American Axle and Manufacturing, Delphi Automotive PLC, Goodyear Tire, Standard Motor Products, and TRW Automotive.  (I once had a friend who worked for TRW.  I wonder where he is now….)  The fact that so many have good rankings says that the industry is hot at the moment and might be a good place from which to select stocks.

Looking through the individual pages, one interesting pick is Allison Transmission.  This stock does not have a Timeliness rank because it is too new.  It also does not have enough of a price history to see if it has the nice, steady incline that I look for in a stock.  Still, Value Line is projecting total returns of between 6 and 18% per year over the next 3-5 years.  Those projections are not certain and the stock carries some risk of being a loser.  Still, it might be worth putting some money into Allison Transmission since it would mean a chance of getting into a newer stock that went public just a year ago.  The 1.6% dividend is also attractive.

Borgwarner Inc. also has in interesting stock price pattern.  It has grown relatively consistently since 2003, with a break in the 2008-2009 bear market.  Earnings projections are 14%, which is respectable, and it had a 2-for-1 split about a year ago, which usually happens to stocks that are doing well.  Timeliness on Borgwarner is only a 2, however, and the projected return is only predicted to be between 3 and 12%.  This means the stock may have already seen most of the gains it will for a while and need some time to cool down.

China Automotive has a Timeliness of 1, but its price pattern is all over the board.  This might be a good stock if you are looking for something to buy and sell within a few months or a year.  I tend to look for long-term buys, however, since I find it is easier to find stocks that will grow for years than predict when a volatile stock will go up and know then when to sell.  The company also has a Safety of 4 (5 is the worst and 1 is the best) and earning’s predictability of 50%, so this would be a speculative stock with a very uncertain return at best.

The main point of this post isn’t to give specific stock suggestions, although the one’s I’ve given might be a good place to start for your research.  It is more to show the things I look at and how I evaluate a stock for purchase.  I may in fact buy some shares of Allison Transmissions, but it won’t be one of my main positions because of the uncertain nature.  I like the ability to get into things “near the ground floor,” however.  But this does not always work out.
Much as I enjoy writing about investing, it doesn’t make sense unless people are reading. If you’d like to keep the articles coming, please return often and refer a friendhttp://smallivy.wordpress.com. Comments are also greatly appreciated, as is lively and friendly debate. Also feel free to link to or reference posts – all I ask for is fair credit.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

Where to Invest $5,000. Some Great Stocks Under $50 per Share


Scanning through Value Line today, I didn’t find any stocks that just made me want to rush out and buy, but I did find some interesting picks.  Some stocks are pricey ($75 and up), meaning it would take at least $7500 to buy 100 shares, which is about the point where you get a reasonable percentage for the commission.  Here are some of the stocks I found and why I found them attractive:

Apartment Investment and Management Company (AIV):   Apartment Investment and Management Company, aka Aimco, is an REIT that invests in apartment buildings.  They currently own 265 apartment buildings, which includes 67,977 apartments.  If you bought into this REIT, you could become a landlord without getting calls in the middle of the night to fix the heater.  The REIT doesn’t offer a lot of appreciation potential, meaning that the price will probably stay fairly stable and isn’t expected to increase much, but it currently has a 3.5% payout to owners.  If held for a long time, it is likely they would increase their payout, resulting in both an increase in the percentage an investor would get for the initial investment and a move up in price.  This would be a good investment for an income account such as for a retiree who wanted current income, or maybe an educational IRA with only a few more years before the money will be needed.

Dow Chemical (DOW):  Dow offers both price appreciation potential and a nice, 3% dividend. Value Line sees possible earnings increases of over 14% over the next five years, which in turn will provide price increases in the 7-12% range.  The dividend is also expected to increase by about 10% per year, which will help move the price upwards.  This is a more risky play than the Aimco since the is has traditionally been difficult to predict the company’s earnings.  While Dow is a strong company that can weather some bad times, the stock might decline a bit if earnings disappoint.

BJ’s Restaurants (BJRI):  As a disclaimer, I own several shares of BJ’s and have for a few years.  Still, there is a reason I own so many shares – I think the company has a lot of long-term growth potential.  The microbrew beer and gourmet pizza chain has some very popular and profitable restaurants out west, but they have yet to really enter the eastern market.  I expect them to meet up with Old Chicago Pizza somewhere in the midwest, at which point there’ll be a brawl for domination.  I like that they have a very successful concept and that they have a lot of room to expand.  As regular blog readers will know, I’m looking for stocks that I can buy and forget about for several years while they grow and grow.

Value Line doesn’t expect them to perform much better than the market over the next year – they have a Timeliness Ranking of 3, which is average for the market.  Still, they have a prediction of 16% annualized earnings growth over the next five years and an annualized rate of return of between 22 and 35% because the shares are so depressed in price.  This is a stock that will require patience, however, since it may sit for a while before the spark finally catches and it goes up in price.

Pier One Imports (PIR):  This stock has had disappointing numbers lately.  The reason offered by management is that the snow (where is all of this global warming when you need it?) kept a lot of shoppers home during critical weekends.  Value Line has therefore trimmed their earnings estimates.  Still, they are expecting 13% earnings growth annualized over the next five years and, more exultingly, 36% annualized dividend growth over the same period.  With a 25% Return on Equity, the company must be doing something right.  Again, this may be a stock that doesn’t do much for a while, but you can be collecting the 1.2% dividend while you wait.  If the dividends do grow as expected, you’ll see the price move up accordingly.  Annualized returns of 7-20% are expected here.  Once again, I hold an interest in this company.

Greenbrier (GBX):  Another company I’ve been looking to acquire an interest in is Greenbrier Companies, Incorporated.  This is a company that designs, makes, and repairs railroad freight cars.  Railroad is booming right now – they are the third timeliest industry group in the Value Line universe of stocks.  The energy boom is causing all sorts of oil shipments, and Greenbrier is supplying the cars for moving that black gold down from the drilling fields to the refineries.  This is not a great long-term play – 3-5 year price appreciation potential is relatively flat and they don’t pay a dividend.  The stock has been going up recently, however, and it may well continue to do so for a while.  For those who are momentum investors, it might be worth taking a ride on this train.  Just be ready to jump off – this isn’t something you want to hold once the momentum turns the other way.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Don’t Panick!


In Hitchhiker’s Guide to the Galaxy, each celestial hitchhiker would carry a guide with him or her.  Emblazoned on the cover of that book were the words, “Don’t Panic.”  Perhaps investors who have been watching the market fall over the last couple of days should take the same advice.

It is actually at times such as this a good idea to just sit pat and relax.  In fact, it is after the large market drops that there is a potential to make the biggest gains.  One could have made a huge return on stocks from 2009 until 2013.  Likewise, there were huge gains to be made from 2003-2005, 1992-1996, and 1980-1984.  Buying in after the stock market crash of the 1930’s would have been a great idea, as would buying after the crash in 1987.  Many times stocks will recover to their previous highs within a year or two after a downturn,

Unfortunately, most investors do just the opposite.  When stocks go up, they rush in to buy.  When they go down, they sell in a panic.  In fact, there are people who look at what retail investors are doing and sell when they start to buy stocks and buy when they start to sell.

This doesn’t mean, however, that you should make a huge purchase of a stock just because it has declined a few points.  Just because stocks have gone down a little doesn’t mean that they won’t go lower.  The act of trying to buy a stock as it declines in value is called “trying to catch a falling knife.”  Many people who try this trick soon find that just because a stock seems cheap compared to where it was recently doesn’t mean that it can’t go lower.  Sometimes stocks were way overvalued and have quite a way to fall before being reasonably valued again.  Sometimes they also become very undervalued and stay that way for longer than you would think.

The best thing to do if you have some cash on the sidelines is to buy in slowly.  Make a small purchase, wait a few days or a few weeks, and then buy a little more.  Do this each time there is another decline.  While you may not buy shares at the lowest possible price, at least you’ll be paying less than you would have a few days ago.  By purchasing in installments you won’t have the psychological effect of taking a loss and starting to wonder if you made a mistake in buying the shares.  Many people who see a stock continue to fall panick and sell out right before the stock was about to rebound.  If you keep some cash on the sideline, you will be hoping for the shares to go lower since that means you can buy some shares at a lower price.

It is also a great time to save up some cash from your job and buy some additional shares as you can.  Perhaps also put some money into your IRA for next year (or put some money into your IRA for this year if you haven’t already.

Just remember to not panick. If you find yourself worried, there is nothing wrong with just ignoring the market for a few weeks.  Things will be just fine.

To ask a question, email vtsioriginal@yahoo.com or leave the question in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.