Market Insights

Bubble Watch: NFT’s

Bubble Watch: NFT’s 150 150 JP

I am going 180º in the opposite direction than Gary Vaynerchuk and what seems like every other social media influencer on this one. NFT’s are all garbage. Just like sports cards. Does that mean people shouldn’t or won’t pay a lot of money for them? No. Too many people are paying hundreds of thousands of dollars for cardboard based on a desire to want something rare. This happens even when the “scarcity” is bullshit. That said, I do think that we’re going to have a massive collapse in this market to accompany or front run collapses in other markets.

On a side note, I am not a proponent for heavy government regulations; however, I can see a huge parallel to the early 1900’s when the Securities and Exchange Commission initiated its laws for the securities markets. I can see why these agencies felt they needed to do that, especially when you have a large number of people being influenced by a few hype artists, formerly called snake oil salesmen. The same thing is happening right now with NFT’s and Cryptocurrency. We’ll see how long it lasts.

DCA: Oil 2020 to Present

DCA: Oil 2020 to Present 150 150 JP

The hardest thing to do is follow your own advice and strategies in the face of extreme fear and uncertainty. At the end of 2019, I had a small position in Occidental Petroleum ($OXY) with a price point under $40. The stock had already been cut in half before I started to buy.

Fast forward a few months and the Covid crash was in. OXY had dropped form $40 down to $10 a share and bounced up to $20 and back below $10 by the end of Halloween 2020. This would have been the time to dollar cost average.

Here’s what an intelligent swing trader would have done. Starting with 100 shares at $40, buy 400 shares at $10, either in March 2020 or November or both. Now you have 500 shares with a total investment of $8,000. Today, that’s worth $13,000. Now, a tidy 62% profit over two years isn’t crypto style winning, but if you can do that every 2 years for the next 20, you’ll be in good shape.

Note to self… follow your own system better.

Fairy Dust and Chinese Stocks

Fairy Dust and Chinese Stocks 150 150 JP

I think it would be interesting to put together a derivative contract that mimics the performance of certain small businesses in certain cities across the United States and let’s investors buy the instrument/vehicle/contract but never ever have ownership in the businesses themselves. This is exactly what happens when you buy stocks in Chinese listed companies.

Under Chinese law, it is illegal for foreigners to own certain big important Chinese tech companies. Almost every listed Chinese company investors can buy outside of China is through a structure called VIE — Variable Interest Entity. It’s like a derivative contract with zero real ownership in the company.

Here’s how it works. A company like Didi Global sets up a company in the Cayman Islands that can be owned by anyone. This company enters into a series of contracts with the local Chinese company, giving it certain carefully curated economic interests and control rights over the Chinese company, not real ownership. Then you list the company on the Nasdaq or NYSE and people buy its stock, most not knowing that they have no rights at all in the actual company. The company is more or less an empty shell with a loose contract.

So, fairy dust…

Of course, the fairy dust could be worth more and more as the company grows. Even in the United States, owning public equities doesn’t mean a damn thing unless you have a controlling interest. China would never allow anyone that level of control. With that in mind, there are more than 240 Chinese companies listed on US exchanges with a total market cap exceeding $2 trillion (USD) and most of these companies are tied to contracts held in shell companies in the Cayman Islands.

Do you see a problem?

Of course, there are plenty of big name investors that love these VIE’s. Charlie Munger and Monish Pabrai both hold a lot of Alibaba (BABA) and Chase Coleman’s Tiger Global Management has over 7% of their portfolio in (JD), which is perfectly fine as long as there isn’t corporate fraud or even just legal slight of hand that would be detrimental to the shareholders. This is the reason why so many Chinese stocks in the same space and generating similar revenue and profit as American based stocks sell for discounts in the market.

Know the risks…

The VIE stocks could go zero while the underlying real business remains fine. I don’t think that would happen since China would have to screw over a lot of people globally to stomach that; however, the SEC is now requiring certain disclosures to be made on IPO docs. The structure is illegal under Chinese law, which has not stopped companies from using it thus far. China is a communist capitalist country where property is allowed to be privately owned; however, if history is any indicator, how long that will last is anyone’s guess.

Avoid Robinhood (for now)

Avoid Robinhood (for now) 150 150 JP

Robinhood, creator of the first free investing platform began trading as a public company today, with a market value over $30 billion. That’s roughly the same cap as Kroger (KR), but the grocery chain does more in bottom line net income than Robinhood generates in top-line revenue. The market is truly strange at the moment and likely building a bigger bubble.

As far as active user accounts, Robinhood only trails Fidelity and Schwab. Schwab is valued at north of $130 billion. Robinhood has already forced Schwab, Fidelity, and others to offer free trading to users. It’s only a matter of time before the technology platform allows for more and more and more.

I like using it personally, but I’m not trading a bunch of money there and understand that glitches have happened. So what. What matters is the stickiness of the accounts over the long-term. My guess is it’ll be around for a while.

That said, it’s not exactly a bargain at the current valuation, and if the stock gets cut in half or 1/3rd from this price point it may be worth owning.

The Palantir Opportunity

The Palantir Opportunity 150 150 JP

Palantir sells software solutions aimed at solving the issues of data integration without requiring organizations to start from scratch, and provides a centralized view to gain insight from the data through artificial intelligence supporting manual operations.

Palantir may be the best positioned organization to profit and grow with the expansion of big government. Its stock recently began trading publicly allowing anyone with about $10 to buy a share.

Sounds cheap. It’s not.

The company has 1.6 billion shares outstanding putting the market capitalization at more than $15 billion on $900 million in annual sales.

The company has about $1.5 billion in new cash, so ex-cash the stock is trading at about 15x sales, which will grow substantially in the next decade. Will the value of the company grow as well? That’s the question.

If the average technology company trades at 10x sales and if Palantir is just getting started in the growth phase, where it could easily see $5 to $10 billion in annual revenue in the next 10 to 20 years (or sooner) then the stock is grossly undervalued. $10 billion in sales with interest rates where they are in 10 years, could mean it is a $100 billion company, which would easily outperform the S&P 500.

Dollar Cost Averaging: Examples

Dollar Cost Averaging: Examples 150 150 JP

Have been talking a lot about investing in the last few days. That’s because while the market continues to rebound from March lows. Oh, don’t think that anyone is the kind of investor that can go error free. Even the best investors can make mistakes, big money losing mistakes. Kraft Heinz has lost Warren Buffett’s company Berkshire Hathaway billions of dollars in the short time it owned the company. For him, there’s nothing to do except take it on the chin and wait, unfortunately. For the rest of us mortals, it’s important to have management strategies when a trade gets cut in half, or worse. For illustration purposes, let’s take a look at the following chart of Bed Bath and Beyond, arguably one of the best retailers in the last two decades, and how it traded at the end of last year.

This is the last year of daily prices. The [D] signifies dividend payments equating to another 5.05% of added value. Let’s say you bought in at $15 per share in May, thinking that the stock, long-term, is good for a double, but by mid-August are scratching your head with a 50% loss.

What do you do?

Well, if you believe in the longevity of the underlying company, then it is typically a good strategy to dollar cost average, investing the same amount of money at the new lower price as you did originally. So, if you bought 1,000 shares at $15.00 per share, investing $15,000, you should then buy 2,000 shares at $7.50 per share, investing the same dollar amount — if you can. This brings your average price down to $10, which as the chart suggests, would mean today you’re sitting on a 40% profit.

40% Gain in less than 7 months.

This was obvious in hindsight, and while I’ve done this hundreds of times with investors all over the world, it doesn’t get any easier and won’t be next time the market drops 30%.

More Examples…

As the S&P 500 continues to climb back to and above its all-time highs, I start to think about portfolio management — one of the most important aspects of investing. Anytime you find that a company can produce above average profit on investment (“high yield“), you should consider owning it, regardless of whether you already own it at a different price, especially if the earnings are consistent and can remain that way into the future.

In most cases portfolio management is simply building a base of 20 to 30 great stocks, bought at the right value, and letting them ride long-term. However, I’m a big advocate for dollar cost averaging in the cases when stock is bought in a good company but decreases in price over the short term. Here are three examples to illustrate the point.

Pier 1 Imports (PIR)

If you estimated the value of the company in 2008 at $12/share (like Warren Buffett did), you probably bought it all day long for $4. What happens if the stock dropped to $1 and you still valued the company at $12? Would you sell or buy more? This is the hardest question for investors of all experience levels to answer. Yet, between 2008 to 2012 the ride of PIR was remarkable and dollar cost averaging would have produce solid results.

Price on September 19, 2008: $4.43
Shares on Initial $10k Investment: 2,250
Price on January 9, 2009: $0.57
Shares on New $10k Investment: 17,500
Total Investment: $20,000
Total Shares: 19,750

Price on January 3, 2013: $20.71
Total Account Value: $409,000
Performance Rate: 1,945% gain

Cliffs Natural Resources (CLF)

Another, more recent example is that of Cliffs Natural Resources (CLF). At the start of 2015, CLF was traded at $7.03 a share. By the start of 2016, the stock was down to $1.61.

Price on January 2, 2015: $7.03
Shares on Initial $10k Investment: 1,422
Price on January 8, 2016: $1.61
Shares on New $10k Investment: 6,211
Total Investment: $20,000
Total Shares: 7,633

Price on December 1, 2016: $8.78
Total Account Value: $67,019
Performance Rate: 235% gain

Petrobras (PBR)

Another recent example is Petrobras (PBR) the Brazilian oil company. At the end of 2014, PBR was traded at $9.72 a share. By the end of 2015, the stock was down to $4.74.

Price on December 3, 2014: $9.72
Shares on Initial $10k Investment: 1,028
Price on December 1, 2015: $4.74
Shares on New $10k Investment: 2,118
Total Investment: $20,000
Total Shares: 3,146

Price on December 1, 2016: $10.87
Total Account Value: $34,204
Performance Rate: 71% gain

Heading into 2021

Whether it happens next year or the year after, the short term crash the US markets experienced in the beginning of Covid is nothing compared to what could happen sooner rather than later. Of course, that would be caused by the trickle down affect of continued lockdown across the US or re-lockdown procedures that could happen in Q4. The idea here is that currently, the market is dislocated from the economy. That cannot last forever.

We’ll see.

A List of Dividend Stocks for the Current Market Panic

A List of Dividend Stocks for the Current Market Panic 150 150 JP

100 years ago, we (Americans) called sudden drops in the stock market panics. Now they’re recessions or bear markets. If you can be greedy when others are fearful and keep a level head when doing research, you’ll be fine.

On Finviz there is an incredible stock screener that investors should use to find and buy better stocks. With the market down 30% since its high in December, now is the time to start finding stocks for both the long and short-term. So far, I’ve lived through the S&L Crisis in 1987, the Dotcom Bust in 2000, the Housing Bust, and now Covid-19 — every time it was a different catalyst. That means, there will be different companies that offer the most upside.

With that in mind, here is a shortened list from a recent screen that produced over 370 stocks which yield more than 10% in annual dividends. There is a caveat. The earnings in these companies will likely be lower in the short term, maybe irreversibly damaged, but for many 10% will be the new baseline long-term and that will produce better returns than any major asset class, for 99% of investors. So, it’s worth exploring.

Note: This post will not provide any further insights onto why, figure that out for yourself. By the time you read this, yields may have changed, but I have tried to only offer up the companies that will likely not cut their dividend entirely, even if some cut backs take place.

1. The world’s largest ad agency (WPP) is offering a 12% yield

2. The Gap (GPS) is also offering a 12% yield

3. Asset managers Invesco (IVZ), Apollo Global (APO), and AllianceBernstein (AB) are yielding 14%, 11%, and 17% respectively

4. Ford Motor (F) is yielding 12%, and the race for electric vehicle supremacy is still far from over

5. One of the largest owners, suppliers, and operators of gasoline stations and convenience stores, Global Partners (GLP) is offering a 20% yield right now, with the stock down 50% this month

6. Retailers Kohl’s (KSS) is yielding 14%, with Big Lots (BIG) yielding 11%

7. Credit service company X Financial (XYF) is yielding over 11%

8. Iron Mountain (IRM) offers a10% yield

9. Foreign banks SantanderBarclays, and BBVA all have super sexy yields right now, and banking will still be the underlying ruler of the world, even in its current flawed form

10. Brazil’s largest electric utility firm Companhia Energetica de Minas Gerais CIG is providing 10% yield right now

11. Life insurers AegonING, and Prudential carry heavy yields of 18%, 15%, and 10% respectively. Let’s remember that current numbers for death to cases of Covid-19 is around 3%. I don’t know if that will put these firms under any long-term risk of bankruptcy.

12. Major oil and gas company’s XOMEni, and BP are getting hit twice with the price of oil per barrel below $30, but each yield over 10%. These could get much cheaper if oil drops into the teens.

13. For the non-major oil and gas companies that include drillers, equipment and service providers, refining, pipelines, etc. the list gets pretty long. A few of the better ones are CNOOCHolly EnergyWilliamsMarathonSunocoPhillips 66, and Valero which all yield over 10%.

14. B&G Foods, food manufacturer of grocery products like Skinny Girl and Weber is yielding 11%.

15. There are at least two pages of REITs but I stayed away from them, but there are two real estate developers Xinyuan and Brookfield that offer 16% and 12% respectively.

16. Cruise Liners Carnival and Royal Caribbean are struggling hard so the 15% and 11% dividend they have now will likely get cut.

17. Big restaurant chains Ruth’s and Brinker also yield over 10%, mainly because both of these organization’s stock has drop to levels I haven’t seen since before 2012.

Could it get worse? Of course. Every stock listed here could be down another 20–50% from today’s trading price by the end of this viral scare. My main question is will this be a one off black swan even, or will it be the norm?