VIRTUAL DAN

VIRTUAL DAN

Notes from my travels around the internet

VIRTUAL DAN
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Category Archives: Investing

Expedia – After The Drop

In September I made an ill-timed move into Expedia stock, just in time to see the stock drop by 30% in November. The drop was primarily due to a bad earnings release – revenue number lower than expected and and EPS miss by $0.43 a share. In addition, the market is spooked by Google getting into the vacation rentals space in this already competitive environment.

So what to do now? Do I bail or buy on the dip? Arguably, its too late to bail on the stock:

6 month Expedia stock price

So I need to see if it makes sense to add to my position – because if I liked it at $132 I should love it at $94. Looking at the forward estimates does’t paint a great picture:

For the last year for Forward Twelve Month estimates (FTM) have been consistently dropping, at even after the drop the forward price earnings growth (PEG) metric is historically high. So that explains the nervousness about the stock.

However, if you believe the nervousness that Google will keep squeezing Expedia is overdone, and they can stabilize EPS growth, I think there is some opportunity here. Short term I think the drop is overdone. This is still a stock that is growing earnings at 50% per year, with a PE below market. Not that I am super bullish on this stock long term, I just think its OK to play for a bounce on this. So in my case, I added to my position in late November to get by cost basis break-even lower. I think this will be a short term (1-2 month) trade, with the assumption that I will lighten up on my Expedia holdings after a month or so, and take the short term tax loss on my initial purchase. My valuation and technical model is positive on this stock for the month of December, so I would guess the majority of the bounce will happen in the next 30 days. After that, I will have to wait and see because my model doesnt forecast past 30 days.

Long term, I am not sold that Expedia will dominate the travel world, but I think its worth a 30 day trade to assume that everybody who was going to sell has already sold.

December 1, 2019 Dan Leave a comment

Billionaire Philanthropy

The recent 2020 campaign discussions on billionaire taxation are bringing about an interesting discourse, but I wish someone would bring up problems with current philanthropy rules. It seems to me an easy step for someone to take would be to tighten the loopholes of big charitable giving.

This article does a great job discussing The Perils of Billionairre Philanthropy. It seems to me that charitable giving has surreptitiously become primarily a tax avoidance tool for the wealthy. A great stat from this article:

In the early 2000s, households earning $200,000 or more made 30 percent of all charitable deductions. By 2017, this high-earner group accounted for 52 percent of donations. And the total share of charitable deductions from households making over $1 million dollars grew from 12 percent in 1995 to 30 percent in 2015, according to IRS data.

Why the change? A couple reasons in my opinion.

  1. Donation of appreciated stock. A hidden gem of tax avoidance for anybody who has stock that has greatly appreciated. When you donate stock to charity, you get to take the charitable donation credit on the full value of the stock, without taking the capital gain. A couple great examples here. Bill Gates donated $4.6 billion dollars of stock to his foundation in 2017 without paying any capital gains. Lets assume his cost basis on that stock is near zero, and he is in the tax bracket that would pay 20% capital gains tax. By doing this, he was able to avoid paying roughly $920 million in capital gains in 2017. In 2018, Warren Buffet donated 3.6 billion in stock to the Bill and Melinda Gates foundation. Using the same math, I count that as $520 million avoided in capital gains taxes. That’s $1.5 billion in lost taxes in these two examples alone. Yes the money goes to philanthropic ventures, but is that equitable? Now.. it is a pain to donate stock to charity.. which leads me to #2.
  2. The rise in Donor Advised Funds. Donor advised funds are a great tool to give to charity for the wealthy (and upper middle class) to get a tax break. The game here is instead of giving directly to charity every year, every few years to give a lump sum to a Donor advised fund, which is essentially a pool of charitable money that can then be distributed to a different charity at any time. By giving a lump sum, people who do not hit the threshhold for itemizing their taxes can now get a charitable tax break. An Example: Lets say a married couple earns $16000 in taxes, and gave $3000 in charitable gifts in a year. Given the standard deduction is over $20k it makes sense to just take the standard deduction and not take itemized deductions, thus losing your charitable deduction. However, if instead of giving $3k to charity every year, you give $15000 to a Donor advised fund every 5 years. This gives you a $12,000 write-off every 5 years for charitable contributions because you can itemize that lump sum every 5 years. The kicker of course is, if you have appreciated stock, you can contribute your appreciated stock (see #1 above) to the fund to further leverage your contribution and take advantage of tax rules. Then, thoughout the year you dole out your money to your favorite charities from your balance in your Donor Advised Fund. These funds are very easy to set up and use – but how many people can take advantage of them?

It occurred to me that companies that have a 401k must follow strict IRS guidelines to ensure their plan is equitable by ensuring employees participate from all income levels. These charitable donation loopholes have been around for years, so they likely have bipartisan support because they encourage charitable giving. But how hard would it be to look at the above issues to make them equitable? Either change the rules to either cap tax free contributions, or change the rules so people from all income levels can take advantage of these tools.

November 9, 2019 Dan Leave a comment

Renewable Energy Takes Charge

A minor milestone on the renewable energy front – renewable energy sources have taken over market share from coal for the first time:

This Ars Technica article has the full story. I see no reason why this trend won’t continue, as solar prices have been dropping and even battery technology is getting better.

This chart from the US Energy Information Administration also shows an interesting chart – total US energy usage, while up in 2018, has been relatively flat since the mid 2000’s:

https://www.eia.gov/todayinenergy/detail.php?id=39092

Given the rising market share, and the aging of the US population, it seems that petroleum share will have to start shrinking. The primary reason its share has been rising is the dramatic fall in oil prices since 2010. The price of crude oil is now roughly just over half of what it was in between 2010 and 2014. One would think that with the advances in Solar and Wind power lowering the costs of electricity, petroleum prices will have to continue to fall in order to maintain market share.

September 19, 2019 Dan Leave a comment

The General Electric Saga

A lot of good reporting has been done regarding the General Electric (GE) ‘fraud’ accusations, one of the better is which is this Bloomberg article. In summary, the accusations are that GE has under reported its reserves for its long term care business, and will be in need of more cash than would be expected.

My take on all this reminds me of my take on the Boeing problems. In that post I refer to anecdotal evidence that something was amiss with management.

While its been many years since I have worked for a GE company, my take on this is agree with the whistle-blower Harry Markopolos. In many ways it does remind me of the Bernie Madoff story. I don’t think Bernie Madoff started out to be a crook. I think many people bend the rules once they start to get into trouble, then keep bending, then bending until they are so deep they realize it would be financial ruin to come clean, so they just keep putting it off. I recall a client I worked for who had a startup with lots of investor money in the early 2000’s. He had a small company and staffed up to build a big company, and when the market turned the company imploded and exposed some financial misdoings he had committed to try to keep the dream alive.

So this is the parallel I draw with General Electric. I agree with the theory they have been bending the rules with financial reserves, back when they needed money to make their quarterly numbers. GE is full of financial engineers, and their previous CEO Jeff Immelt was very short term (read that bonus) focused. I am sure they thought that business would pick up and they would deal with the issue before it got out of hand, but when Immelt left the years of dirty laundry left behind by him has been exposed. I am in the camp that GE will end up in Chapter 11, especially if the economy continues to soften as GE tries to sell assets. The most accurate analyst on GE has been Stephen Tusa, and he has a price target of $5 on the stock.

General Electric, like Boeing, is a no-touch stock for me. While the new CEO of GE is much more capable than the prior leader, I think the damage has been done and the cupboard is empty. Now its time to just watch this disaster unfold from the sidelines.

August 30, 2019 Dan Leave a comment

Streaming Wars

The battle for the living room has been interesting to watch from an investing perspective. I have been down on Comcast for years, thinking their business model would be severely hampered by the cord cutters eliminating cable. This has been somewhat true as the stock price has been flattish over the last 5 years:

Comcast 5 year chart

The one stock I have been kicking myself for not owning is Netflix – which has had an incredible run over the last 5 years:

Netflix 5 year chart

Earlier this month, Netflix reported slowing growth, and the stock got hammered – down from 360’ish to 310’ish. Recent earnings showing a slowing of subscriber growth, and fears of the Disney streaming service and Apple streaming service spooked investors.

The way I see it – the market is wrong on this one. Granted Netflix’s valuation is awfully high, but even with their subscriber growth not meeting projections, it was still decent domestically and great internationally. Interestingly their growth in the previous year’s quarter also missed expectations, and it bounced back nicely the following quarter. The word on the street was that areas that had price increases fared the worst. I am willing to bet that subscribers to Netflix are not that price sensitive. Amazon raised the price on Amazon Prime and nobody blinked – I think Netflix has more levers they can pull to raise revenue if they feel the need.

Regarding the increase in competition – I think the market is overreacting on this one too. I agree Disney is going to be a formidable competitor (and luckily I have been long Disney for awhile), but I hardly think Netflix will be the one hurt the most by this. Netflix is an establishment in most households – and I think it has the strongest network effect of all streaming companies. I think the big losers will be the 2nd tier streaming/content services – things like CBS Interactive, maybe Showtime, HBO etc. If people want to cut down their expenses on monthly TV subscriptions, I think Netflix will be low on the list. Regarding Apple’s offering – I am willing to bet that it will be underwhelming and not meet expectations. I still am in the camp that Apple is struggling to execute on its new initiatives, so I think the market is overly concerned about this one.

I initiated a small position in Netflix a few months ago when I saw the stock price weaken on these competition concerns. I prefer to invest in companies with CEO’s that consistently make the right moves, and Reed Hastings meets that criteria. So even though I am underwater on my holdings of Netflix, I am definitely not selling, and considering doubling down on this one – I am just waiting for the stock market and price to stabilize then will take a closer look.

August 17, 2019 Dan Leave a comment

The Chase For High Yield

Every once in a while I get a notice of a bond offering from my broker for Ford Motor Credit. As I am always on the lookout for higher yields, I always pause and give this some thought.


With a 7 year CD yielding around 2.0%, my first thought is sure – Ford Motor seems pretty safe, maybe I should go after a higher yield. But after thinking about it a bit more, I always back off.

A couple problems keep creeping back in. First, I think the next market downturn will be initiated by some sort of credit breakdown, whether it be corporate borrowing, consumer borrowing, or sovereign borrowings – all at historically high levels. There is too much debt out there and so I am leery of low rated credit getting rated even lower. If this happens, I either want to be in high quality corporates, or government bonds. I am not sure I can consider Ford Motor a high quality corporation. The stock is lower now that it was 20 years ago, and has a terrible Debt/Free Cash Flow ratio of 6.77.

The second thought I have is the future of car manufacturers. The automobile industry is in the midst of a huge transformation and will likely look quite different in the next few years. From the switch to primarily gas fueled vehicles to electrics, to the concept of ride share replacing car ownership, I think the automobile business model will change drastically.

This disruption will lead to winners and losers. Will the ride share companies running autonomous vehicles be the winners? Will Tesla be the next big car manufacturer? All these questions nag at me as I look over the yield of these Ford Motor Credit bonds.

Investing in high yield bonds is always difficult. Every high yield bond/corporation has its fault, thus the risk premium. In many ways its similar to investing in stocks. It requires an investment thesis and opinion about the future. And for me, a low rated bond focused on consumer credit and the car industry looks like a risk that is too big to bear.

July 9, 2019 Dan Leave a comment

Finally – A Clean Financial Data API

For years I have been automatically retrieving financial data from a variety of sources to help manage my stock portfolio, and power the VFS Daily Investment Contest. For years I just scraped prices from various websites and parsed the results into a database. Its not elegant, but it has worked. I have been looking for cleaner ways to do it, but many of the online data services for financial data charged high monthly prices that didn’t make sense for the minimal quotes I retrieve on a nightly basis.

Recently, I stumbled across a great new service to pull all sorts of financial data. In addition, for my needs I can likely stay at the free level, and its the cleanest API I have seen for financial data.

All I had to do was sign up for a free account, which provides a token that I can use to access the data. The API calls are all simple GET requests, with the token in the querystring:

The result is nicely formatted JSON, which can be easily parsed using library (I use Newtonsoft). No more parsing and stripping html to get to the data. The full list of data options provided by the API can be seen here. Below is a C# example of the code I use to pull quotes on a nightly basis:

(click to expand)

Amazingly simple, and I have been re-purposing this code to handle requests against other data points, so its real easy to get at all the API end points.

The pricing structure for this is smart also. The free level that I am currently at provides you with 500,000 request points a month. A delayed quote is 1 point, a dividend list is 10 points, and fancier things like full financials are 5000 points. So if you just want to get daily prices you can get virtually unlimited. If you want more advanced data that has been difficult to get to in the past, the free level limits will likely be exceeded. The pricing for the next level up is $9 a month, and that gets you 5,000,000 request points a month which would more then meet even my wildest data dreams.

This is a relatively new operation (the API came out of Beta in April), and they are constantly updating/improving it. It is missing some features I want (Can’t currently get prices for mutual funds, or dividends for ETFs. But those fixes are on their road map to be done soon. The IEX cloud GitHub repository does a great job of keeping users updated on changes, bugs, and upcoming fixes.

As I said above this is a new service, and in this world of online services, many do not survive. I really hope this one does. If you are looking for easy access to a wide variety of data, give this new API a shot. This is a pretty exciting development for financial data geeks such as myself.

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May 31, 2019 Dan Leave a comment

Employment Data As Economic Predictor

Every month the financial press makes a big deal about the total payroll report. I have never really paid attention to it, as it seems like its just headline material rather than anything one can act on financially. Recently, I was poking thru the FRED data sets looking for an employment indicator that I could plug into my valuation model, and the one that caught my eye was a subset of the big monthly number – the Temporary Help Services number.

I put together this chart below comparing the numbers of the Wilshire 5000 stock market index, the Temporary services number, and the headline Nonfarm Payrolls number.

wilshire 5000, temporary employment and full employment chart
(click on image to enlarge)

As far as an early indicator of economic downturn (and hence a stock market downturn), it seems like the temporary help number is a much better indicator. The temporary help number started trending downward months before the non-farm payroll number, and even started rising sooner after the 2001 and 2008 recessions. There are some ‘headfakes’ in the temporary help number, but with a little smoothing I think my stock market model can be taught to ignore those.

One thing I have learned over the last several years while looking for correlations is there are a lot of coincidental correlations. So when I add data factors to my model, I give the data a good old fashioned smell test – does this data seem reasonable? In this case, I have rationalized that yes, it seems reasonable that in an economic downturn, companies would start jettisoning temporary employees early as they start to slow down, since those are typically the easiest and cheapest employees to part ways with.

So now when the monthly noise comes out about the jobs number, I will continue to ignore that number – but that will trigger me to look deeper at the temporary help number that gets released at the same time.

May 20, 2019 Dan Leave a comment

Townsquare Media Goes Digital

Townsquare Media is a company I have followed for a few years. I decided to post an article on Seeking Alpha about the company because I think it has an interesting story. The company primarily runs a number of rural radio stations, but is now working on tools to upsell its advertisers.

This stock has long been a value trap (and may still be), but if this new strategy pans out, it might be worth a look. For more details check out the article on Seeking Alpha.

Townsquare Media: Digital Solutions Could Be Catalyst For Growth

May 2, 2019 Dan Leave a comment

UFPI – To Sell or Not to Sell

Note – Post updated on 4/27/19 – see below.

The other day I was looking over my portfolio to make changes based on what my valuation model suggested. One of the stocks in my top 10 holdings, Universal Forest Products, Inc (UFPI), came up as a stock to underweight based on relative valuation. UFPI is a pretty inexpensive, low growth stock, and it had a small run in the last few months.

As I often do with stocks in which I have a short term gain, I give some pause to selling. My model predicted a .44% increase in May, so its not like I was bearish on the stock, just thought there might be better alternatives in other securities. So I took a quick look to see if it might make sense to sell a covered call against my position, collect some extra income since I don’t think the stock is going to move much in May. So I pulled up the options chain, and saw an interesting tidbit:

It is interesting to see that the volume on most UFPI options is zero. This is a small 1.89 billion market cap stock, not followed by many people. But curiously, in this list of zero options, someone tossed down a 40 contract trade betting that the stock would go from its current price ($31) to over $35 by May 17th. Granted that is only a $400 investment (40 contracts @ $.10 * 100 shrs a contract), so this isn’t likely the so called ‘smart money’, but it is curious. UFPI releases earnings tomorrow (April 24th) after the bell – perhaps some small roller is ‘playing a hunch’ and trying to earn some extra cash.

At any rate, this raised my curiosity enough for me to hold onto my position until after the earnings release. I am not in any big hurry to sell, and maybe this is telegraphing some good news around the corner.

4/27/19 Update

Earnings came out more positive than expected, pushing the share price from around $30 to a $36.65 close on Friday. those options purchased for $0.10 are now worth approximately $1.90. That $400 option investment translates to a current value of $7,600. So it appears that if you are going to sell a stock, it may be worth always check the options trades to see if anybody might be making a big bet.

April 23, 2019 Dan Leave a comment

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