Saturday, March 24, 2007

BUY: TTES (NASDAQ)

Because I was compelled to sell PLAY before the one-year period, I have free money to invest in my bank account. I was thinking of lowering the cost of my WON position, as the stock price has fallen a great deal in the last while... This has been an excellent opportunity to learn about the difference between tangibles and intangibles and to discover that in addition to more condensed information, one should really look at full balance sheets when making decisions.

Essentially, the bulk of WON's book value was goodwill. The loss they posted this year was in fact a paper loss -- they simply introduced a "special charge" and charged away almost half a billion dollars of goodwill. POOF! There goes your magical book value, from ~$8.00/share down to ~$2.35. So the bottom line of their income statement is relatively meaningless. On the other hand, their current assents only cover current liabilities 1.24x (for 2006, against 1.72x in '05 and 2.14x in '04). Meanwhile, although interest coverage has slipped and interest expenses have risen, total liabilities and (long-term) indebtedness are lower than in 2005.

Now, a company will often hit itself with special charges in a year that in considers to be abnormally bad in order that future results are then presented in an exaggeratedely positive light further on. So the question is, does WON's management have a compelling reason to believe that 2007 will turn out better than 2006? Frankly, neither the earnings picture, which is declining over the past 5 years by all measurements (net, EBIT, &c.) against a general trend of advance in the economy, nor the financial position of the company, are particularly rosy. Moreover, the price of the company is not all that attractive. It looks like its appearance on the magic site is one of a few artifacts of the formula working in general but being spectacularly wrong in some cases.

In this case, the return-on-capital number seems phenomenal even though it is calculated like this:

ROC = EBIT / (Net Working Capital + Net Fixed Assets)
=EBIT / (Net Current Assets - Net Current Liabilities + Net Fixed Assets)
=EBIT / ($29.31M + $37.35M)
=$79.94M / $66.66M
=120%

It's not that the ROC isn't a valid metric -- on the contrary, it's proven to be a valid one in tandem with earnings yield. I would argue that the problem for this case is that the ROC -- which would normally be wonderful -- is overweighted and overlooks the following:

  • That Net Working Capital is shrinking due to increases in current liabilities and decreases in current assets.
  • The aforementioned 5-year shrinking earnings.
  • The fact that even after that whopping charge, 67% of the company's supposed assets are intangibles. e.g.: Shrink that $2.00 book value down to $0.66/share (this isn't necessarily a big deal -- just a shocker based on the $8/share figure I thought it was a month ago).

To make a long story short, I'm buying elsewhere.

Initial bank account: $3,883.37
Total cost (shares): $3,440.50
Total cost (transactions): $15 x 1 = $15
Final bank account: $427.87

Portfolio:

Total portfolio price is 83,724.49. On a random note, every time I do this I think to myself, "Sigmatel can't fall any lower, can it?". Every time, I am proved wrong.

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posted by Ghang! @ 10:00 PM   0 comments

Portfolio Price Update

A few days late -- a most important visitor took precedence over fake stocks and, well, pretty much everything for a few weeks -- the monthly portfolio price update. Between my previous purchases and now, the Dow and other major indices took a pretty serious plunge (the DJIA closed down around 400 points one day and kept falling).

Although the markets have recovered a bit since then, there may be some big drops ahead because of the reason behind the last drops. The markets always react to dangers that are relatively visible years in advance after the fact. In this case, it was a partial popping of what has been dubbed the "debt bubble" (in the form of lender bankruptcees ) that did it. Given the extensive levels of indebtedness in Canada and the US and the fact that many lenders that are still, theoretically, "alive" and "well", have pursued very unbusinesslike lending practices, there may be more to come.

My portfolio currently costs $80,283.99. I paid (minus fees) $71,571.03 for it and this is an increase of $8,712.96 or 12.2% to date. Since the start, index changes are:

  • Dow: 11,278.7695 -> 12,481.01: up 10.7%.
  • S&P 500: 1,309.93 -> 1,436.11: up 9.6%.
  • NASDAQ composite: 2,370.8799 -> 2,448.93: up 3.3%.

While we're still beating the averages, this portfolio definitely has higher volatility than the markets as a whole and the Dow's list of 30 blue chips. This isn't at all unexpected. Although theoretical return has ticked down about 4-and-a-half percentage points, the Dow's return is down 2-and-a-half, the S&P 1.5, and the NASDAQ's 2 percent since the last price update.

posted by Ghang! @ 7:14 PM   0 comments

SELL: PLAY (NASDAQ)

This is a belated sale announcement. It turns out that NVIDIA (NASDAQ: NVDA) completed an acquisition of PortalPlayer Inc. on January 5 for $13.50 a share that it had announced in November. Under the circumstances, I would have received the solicitation from my broker if I really owned the stock. Since PLAY is no longer being quoted on the NASDAQ, I don't have much choice absent other information but to retroactively sell the stock on January 1 for $13.50.

I owned 266 shares of PLAY. Hence, the sale looks like this:

Initial bank account: $292.37
Total revenue: 266 x $13.50 = $3591.00
Total cost (transactions): $15.00
Final bank account: $3883.37

The initial purchase price was $10.10 back on June 18. The return looks like this:
Return per share: $3.40
Net return: $3591.00 - $2686.60 = $904.40.
Percent return: 33.7%

Unfortunately, I think I'll have to keep track of a few other figures in sell transactions:

Total short-term capital gains: $904.40
Total long-term capital gains: $0.00

I'm not sure whether to tax myself at made-up rates close to the actual rates, or whether to just keep track of the numbers above and have the problem that the total return figures over time will be hugely inflated by not taking taxation into account. Given that tax rates change constantly, I think it will be better to ignore taxes and to take the final figures with a grain of salt.

Portfolio:

posted by Ghang! @ 7:12 PM   0 comments