May 30, 2014
Comment on Model Portfolio activity
And the beat goes on. The major market measures continue to
grind higher as economic data remains benign. We added a few shares of Hecla
Mining for old timesí sake. We forgot to mention last week that we added Urban
Outfitters when it dropped on disappoint numbers.† We continue to maintain a
large cash position and are content to watch the grass grow.
May 23, 2014
Comment on Model Portfolio activity
We spent the week watching the markets and- enjoying the weather.
May 16, 2014
Comment on Model Portfolio activity
We traded Cisco this week catching a nice one day move as
revenues and earnings were better than after a quarter of worse than. Isnít it
amazing how large companies can find the revenue and earning they need to avoid
consecutive quarters of lousy news.
We repurchased half the piston in GM warrants. CNBC has been
flogging GM for the last week as a promo for a special they are presenting on
Sunday. This too shall pass.
We repurchased US Steel lower than our sell price last
We are maintaining a large cash position.
May 9, 2014
Comment on Model Portfolio activity
Even with the following purchases which were too enticing to
avoid most accounts are 80% or more cash.
While we were watching, Whole Foods crashed
and is now 40% from its high of a few months ago. Competition in the organic
foods space is hurting margins. But in our mind- since we buy organic- actually
we grow organic- there is a huge difference between Whole Foods organic and Walmart
Ė grown in China- organic. The drop in price for WFM allows us to reenter at an
expensive but much discounted level.
We also added Sprout Farmers Markets when it
crashed in sympathy with While Foods. Spoutís revenues and sales were actually
better than- but all the high flyers of which Sprouts is a member have come
back from the stratus-hers. Sprouts is 50 % of its 12 month high but still
expensive and so we added gingerly.
Abercrombie moved towards $40 a few weeks ago on a
Jeffries upgrade but has this week moved back to the $35 level which we have
used as a trading buy level and repurchased in accounts where we have traded it
profitably twice this year.
We also rented GM common -gingerly. We sold the common at
$38 a few months ago to move to the warrants which didnít work out when the ignition
problem surfaced. We abandoned the stock a month ago to see how the bad
media would affect the shares. But the negative press hasnít dampened sales and
the company is moving aggressively to settle. Our guess is that the total cost
is going to be a onetime $3 billion. Of that $2 billion will be credits to buy
new cars for those who still own the clunkers so it should be treated as an
advertising/sales incentive expense. We plan to repurchase GM warrants next
week when the tax loss waiting period expires. GM has the ability to earn $7
per share when Europe recovers and at 8 times earnings that suggests a $60
price on a stock current at $35.
Abercrombie & Fitch (ANF) are
up 2.31% to $37.61 in pre-market trade after the company was upgraded to
"buy" from "hold" by analysts at Jefferies Group
also raised their price target to $50.
rate ABERCROMBIE & FITCH (ANF) a BUY. This is driven by several positive
factors, which we believe should have a greater impact than any weaknesses, and
should give investors a better performance opportunity than most stocks we
cover. The company's strengths can be seen in multiple areas, such as its
largely solid financial position with reasonable debt levels by most measures
and expanding profit margins. We feel these strengths outweigh the fact that
the company has had lackluster performance in the stock itself."
from the analysis by TheStreet Ratings Team goes as follows:
debt-to-equity ratio is very low at 0.11 and is currently below that of the
industry average, implying that there has been very successful management of
debt levels. Along with the favorable debt-to-equity ratio, the company
maintains an adequate quick ratio of 1.18, which illustrates the ability to
avoid short-term cash problems.
profit margin for ABERCROMBIE & FITCH is rather high; currently it is at
63.25%. Regardless of ANF's high profit margin, it has managed to decrease from
the same period last year. Despite the mixed results of the gross profit
margin, the net profit margin of 5.08% trails the industry average.
& FITCH has experienced a steep decline in earnings per share in the most
recent quarter in comparison to its performance from the same quarter a year
ago. The company has suffered a declining pattern of earnings per share over
the past year. However, we anticipate this trend reversing over the coming
year. During the past fiscal year, ABERCROMBIE & FITCH reported lower
earnings of $0.70 versus $2.92 in the prior year. This year, the market expects
an improvement in earnings ($2.35 versus $0.70).
its decline in revenue, slightly underperformed the industry average of 5.9%.
Since the same quarter one year prior, revenues fell by 11.5%. Weakness in the
company's revenue seems to have hurt the bottom line, decreasing earnings per share.
price of ABERCROMBIE & FITCH has not done very well: it is down 19.99% and
has underperformed the S&P 500, in part reflecting the company's sharply
declining earnings per share when compared to the year-earlier quarter. Despite
the stock's decline during the last year, it is still somewhat more expensive
(in proportion to its earnings over the last year) than most other stocks in
its industry. We feel, however, that other strengths this company displays
offset this slight
Foods reported disappointing earnings yesterday, and shares are collapsing.
Mackey blames mounting competition from other retailers selling organic
groceries, and suggested that the company would lower its prices to draw in
explanations were not enough for Wall Street analysts, who ripped into the
company on the earnings conference call.
got to be honest. Iím not really hearing anything thatís suggesting management
is taking this situation as seriously as some investors want you to,"
Goldman at JPMorgan said. "Thereís a lot of talk about whatís
going, not a lot to talk about what it takes to win the change market."
suggested that the company has failed to change its strategy.
really just curious: What are you doing differently versus a year ago other
than taking your cost down, which I think the marketís telling you may not be
enough anymore?" he implored.
Mackey stressed that the company was lowering prices, Goldman became
Youíve been doing that for years. Youíve been taking price down for years. I
mean, itís hard to understand," he said.
also questioned why, despite slowing sales, the company is stocking more
merchandise than ever.
at Sterne Agee asked management why it hasn't advertised lower prices to
lowering prices, but you havenít been really advertising them within the stores
or doing it in some of the promotions that you do to get the message out
there." he said. "Is it safe to say that thatís still to come or itís
not part of the strategy at all ó youíre just going to lower the prices and
hope that the customer starts to recognize that over time?"
Foods Vice President David Lannon said that the company has made some attempts
to advertise in California.
acknowledged that the call was awkward.
can tell by some of the questions on the call that people may not agree with
our strategy and of course, people are free to make their own decisions about
whether this is a good strategy or not," he said. " But we want to be
as transparent and as honest and as open with our shareholders as we possibly
reminds of a call several years ago when analysts berated Mickey Drexler at J
Crew for missing numbers. Mackey founded Whole Foods and while we donít agree
with his politics we know he knows what he is doing.
founder Todd Harrison:
recently came across a terrific article that addressed 12 cognitive
biases that prevent human beings from behaving rationally. As perception
is reality in the financial markets, I thought it might be useful to address
those issues through the lens of a trader.
This is a
fatal flaw of trading. We tend to surround ourselves with information that
validates our own point of view and dismiss input that conflicts with our
reasoning (also known as cognitive dissonance). This is the primary reason why
we always strive to see "both sides of every trade," as the residual
grist between variant views is where education -- and profitability -- resides.
This is a
manifestation of confirmation bias, or the tendency to surround ourselves with
those who share similar takes on the tape. This could pertain to our physical
environment or a virtual experience, such as Twitter. Not only does this
provide a false sense of security in our individual viewpoints, it makes us
suspicious -- or angry -- with outsiders who dare to question how we feel. (See
also: The Gold Scold.)
the most famous disclaimers in finance is that past performance is no guarantee
of future results. This bias is often referred to as a "glitch" in
our thinking in that it extrapolates what happened in the past to construct an
idea of what will happen in the future. How many of you have played roulette at
a casino under the premise that a string of red increases the likelihood of a
black outcome? That's flawed thinking; the odds of red (or black, for that
matter) are 48% on each independent spin.
our Ten Trading Commandments is that the
definition of an investment should never be a trade gone awry. Nobody initiates
market exposure expecting to lose money, but we should never post-rationalize
our risk (such as ignoring stop-losses or throwing good money after bad). We
would be wise to remember that good traders know how to make money, but great
traders know how to take a loss.
is littered with stretches where in hindsight we're reminded not to confuse
brains with a bull market. This bias limits our ability to properly assess
risk, whether it's overstating an unlikely event (such as buying a stock for a
takeover) or understating an unlikely event (such as Y2K, the fiscal cliff, or
a terrorist attack). Tail events do happen, of course, but betting on an
outlier is a long shot by its very definition.
Observational Selection Bias
when we suddenly notice something we haven't noticed before and wrongly assume
the frequency has increased (when it hasn't). Let's say I bought cannabis stocks as a way to
play (what I perceive to be) the legalization of marijuana. All of a sudden,
everywhere I look, there are more and more signs that support my thesis; the
topic is featured on 60 Minutes, it's a hot-button issue during the
election, it gains momentum in the mainstream media. While some of that may
prove true, I'm on the lookout for news, whether it's conscious or not.
us are creatures of habit in our own way. We use the same toothpaste or align
with a particular smartphone device. That routine often extends to our
investments in the marketplace: We're comfortable with the stocks (or indices)
we often trade and often miss opportunities outside of that comfort zone for
fear of the unknown. Change isn't only positive -- it's inevitable.
face it: We live in a sensationalist society where scare tactics and negative
headlines garner the most attention. If you doubt this for a minute, turn on
your local news tonight. Scientists theorize that we perceive negative news to
be more important than positive news. The risk -- for the bears and for humans
as a whole -- is the tendency to dwell on bad news rather than embrace good
news, and there's the added twist that the stock market is widely considered to
be a leading indicator.
prevalent is this when it comes to the financial markets? They teach it in
college as a stylistic approach (momentum investing)! Nobody in our business,
or in the media, wants to miss a move in the stock market, and history is littered with bubbles and busts that
demonstrate this bias in kind. In life, this is driven by our innate desire to
"fit in and conform"; in the markets, it's driven by two factors:
fear and greed.
predicated on projecting our thoughts and beliefs onto others and assuming that
others are wired the same way (they're not). This can lead to "false
consensus bias," which not only assumes that other people think like we
do, but that they reach the same conclusions. In short, this creates a false
consensus, or sense of confidence, when in fact one doesn't, or shouldn't,
The Current-Moment Bias
This is a
direct descendant of the immediate gratification mindset that dominated society
for many years -- and some will argue that the government is currently
operating in this mode, mortgaging our children's standard of living to achieve
short-term fixes. In short, we want to live as well as possible and pay for it
at a later date (as evidenced by the level of debt and our growing deficit).
The housing crisis was rooted in this bias, as is the basic concept of
tendency, also known as the relativity trap, compares a situation to a limited
subset of information; it's when we focus on a number or value and extrapolate
it to a current situation. This often manifests in the marketplace through the
fundamental metric, when we observe that a stock is "cheap" relative
to its peers or a historical precedent (also known as a "value
May 2, 2014
Comment on Model Portfolio activity
remain all cash. We donít like being all cash but we really canít find anything
in which we have confidence for the shorter term. There are stocks that have
value for the longer term but they are out of favor and the big boys and girls
have been selling them as the markets rise. Since we expect a correction it
should be noted that out of favor stocks are hurt as much as the high flying
darlings in any over 10% market correction that occurs. We are willing to
sacrifice the possibility of profits to have the comfort of not seeing account
values recede 15% and more when corrections occur.
always our market stance is subject to change if news or circumstances in
individual stocks present compelling reasons. But at this time the markets need
to rest either by dropping significantly or stalling for an extended period.
The downside risk over the next few months exceeds upside potential for the
markets as a whole and the undervalued stocks we are following.
then we will wait and watch.
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