Stock investments: how are we doing?
Written by Michael Vass
Back a year ago I discussed my impressions about the stock market. It was a terrible time. There was blood on the streets, and as an investor I loved it. I saw it as the time to step in and buy.
I choose Alcoa (AA) as my intial purchase. I was able to pick up shares at $5.55, which I documented on this site. My outlook was a 18 - 24 month hold seeking to exit in the range of $15 - $20. So far the stock has peaked at about $19.20, but currently trades in the range of $14.38. All in all a very good investment, though some are now looking for the stock to decline to around $12 or so.
My reasons for buying Alcoa have not changed. It has a strong management, aluminum is still a very necessary metal that they have superior control of, and the book value versus price is still in an excellent range. Even if the stock dips between now and the next 6 months I believe I will ultimately reach my $20 upper threashold. At worst I should maintain my lower threashold, with a return of $9.45 or 170% in 18 months. I can live with that return.
Of course not every investment works out so well.
Later last year I did take a position in E*Trade as well. I stepped into that position at $1.55. The outlook I had for the company was 3-fold.
I would see the company taken over, which has not happened yet. I might see the company completely fold, which is less of a concern today than when I stepped in to buy it. The last thought was that the company would just survive, and appreciate based on the fact that it continues to operate.
While rumors continue to abound about a takeover, none has materialized. The latest rumors (which I do not base any investment on) state that the hiring of a new CEO, Steven Freiberg formerly of Citigroup, means the company will go on its own path. This could bode well for the stock, as any improvement with it’s troubled mortgage assets would substantially improve the balance sheets.
At the same time there is the converse rumor. That the company will be taken over because along with the new CEO will be a reverse-split of the stock (a proposed 10-1 split). It is said this will make the balance sheets look more attractive, and lessen the impact for a merger. The new CEO is only an added benefit in that he can add a sense of long-term improvements to the balance sheets, and will add to any new management well.
Both opinions state that the bonus for Steven Freiberg is a big incentive. He will receive $1 million in pay, with the potential for $3 million based on performance. Obviously a takeover would qualify, but so would an improvement in profits. Either should increase the stock value substantially.
My problem is that I do not have confidence in Mr. Freiberg. Citigroup had (and I believe still has) horrible mortgage accounts. They were and are in severe trouble due to the fact they re-insure their own accounts. That means the accounts in trouble are difficult to see. Mr. Freiberg may well have had nothing to do with that, but I do not like that he was in the company atmosphere that allowed such actions.
In addition the reverse-split is going to hurt. Not in terms of valuation, as that will remain the same. The public impression of a reverse-split though is far more serious. It is always seen as a negative. Already the stock dropped on the news, though it has recovered to $1.50 now. Once enacted, the stock will have another 2 - 3 day drop. Partially because of the misgivings of the reverse-split, partially from smaller investors that will see a sudden higher price and will sell assuming they made a huge profit.
Given this I will not sell at this time. My forecast was based on a 2 year investment. Given time, with new management in place and any improvement in the economy, E*Trade should rebound. The potential for a takeover increases as the outlook of the economy improves. Thus as long as the stock does not drop below $1 (or $10 post-split) I believe it is worth holding - as no fundemental change in the company occurs. In my worst case, my profit from Alcoa will offset any loss.
Now beyond all this I am looking forward. What else could be a solid investment? I missed out on buying Sirius Sattelite (SIRI) at $0.55, and it currently sits at $0.85. I don’t think the move to $1 is worth stepping into yet, though if I can get it at r below $.75 I would be interested.
I like financials still, but I have not identified a bank I really like yet. Especially with the new fees from President Obama. I think the Ipad is a fad. I don’t see much in the computer markets, and many other sectors look flat. I expect Wal-Mart to take serious losses if and when there is an improvement in the economy and consumers feel safe to spend more for brand names.
I think that the area that might be of most interest is entertainment. Not movies or music, but video games. They are relatively inexspensive, they are popular in age ranges from 15 - 45. Men and women enjoy various games. And compared to the relatively short time a movie provides they are a better use of money dedicated to entertainment.
Thus Electronic Arts looks like the best bet. The problem for me is that it has a book of $8 (book value 2.3x, I prefer 1.5x), $5.46 in cash per share, and a P/E of 30. The short interest is minimal, but I find it a bit pricey. Of course the summer is a bad time for video games, and the stock should dip. I plan on re-evaluating the investment potential in a month or 2.
Well, that’s enough for now. More soon. And remember, always speak with an investment professional before investing.
**I do not receive any benefit for discussing my thoughts about investments**
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