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Basics 101 – Valuation and Investing

Posted by K on June 16, 2011
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The first in many posts at the Freak Investing School is a series of videos from the awesome Khan Academy.

Over the years I’ve read and studied many books on corporate finance , accounting, investing etc and yet when it comes time to explain the basics I can’t do as good of a job as these videos by Sal Khan. They are hands-down the best interactive source to learn the basics so you will have a better idea of the companies you invest your hard earned money with.

There are a total of 12 videos and while I will link each one below I will only embed the first four.

 

1. Price and Market Capitalization (11:55)     Introduction to price and market capitalization.

2. Introduction to the Income Statement (15:27)   The income statement, revenue, gross profit, operating profit, net income, ROA and ROE.

3. Earnings and EPS (10:14)  Earnings, EPS (earnings per share) and how they relate to the income statement and balance sheet.

4. Introduction to the Price-to-Earnings Ratio (14:47) Price to Earnings Ration (or P/E ratio).

 

– If you were able to get through the first four videos and understood the concepts Congrats!-
Below are more videos to further enhance your learning so you can invest smarter.

  • P/E Discussion (15:34) Discussion of the price-to-earnings ratio.
  • ROA Discussion 1 (10:31) & ROA Discussion 2 (10:17)  The various ways to measure return on assets.
  • Depreciation (12:33) Depreciation a capital asset
  • Amortization (7:45)  Introduction to amortization
  • P/E Conundrum (13:41)  A situation where the price to earnings ratio seems to not fairly price an asset.
  • Enterprise Value (17:29)  Solving the P/E conundrum by looking at Enterprise Value
  • EBITDA (14:07) Review of Enterprise Value (EV) and comparing it to EBITDA

This should hopefully give you a better idea about the basics of investing (mostly fundamentals). As a fun fact if you watched all of the videos like I did you have watched nearly 2.5 hours worth of material, keep it up and soon you will be very comfortable doing your own research and investing.

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We are the champions! Congrats Bruins!

Posted by K on June 16, 2011
General / 3 Comments

I had to post this or I wouldn’t be a true Boston sports fan… sorry

CONGRATS B’s Well deserved!

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Stock Talk: $RIMM Research In Motion near 2009 Lows

Posted by K on June 15, 2011
General / Comments Off on Stock Talk: $RIMM Research In Motion near 2009 Lows

Upon the nightly stock pondering I decided to repay my old pal RIMM a visit at FINVIZ.com

I had last checked this stock out in early April and was in for a surprise. it has since gone south around 45% and its sitting at a low PE of 5.63 (although to be fair it has had a decently low PE for a while). P/E ratio isn’t always indicative of an undervalued stock and it might well be the case that RIMM has lost its edge.  I got rid of my Blackberry device in favor of android back in April hence why I forgot about this until now.

Reading their SEC filings it is obvious that the company is failing due to it being too slow to roll out competitive products and also because it has infringed on many patents there are dozens of Litigation’s going back to 2007 until recently March 2011 that are still work in progress.

 

Ran the annual income statements and balance sheets for the past 3 years through my valuation worksheets and the 3 year average Z-Score is very healthy, net profit margin has still remained in an uptrend and so is the total Asset Turnover. Return on equity and Return of Assets are also in a 3 year uptrend while gross profit margin has dropped 4 percent. The liquidity ratios are mixed but for the most part also good and the company has no debt, $288 million in cash and a total of $2.6 billion in cash/cash equivalents and investments so at the current $19 billion market cap they have 10% cash.

Here is a weekly chart with the $35.05 low from back in March of 2009.

If we were to go back even further there is support to the downside at 34.65 area in the weekly and at that point $RIMM might as well be done but fundamental and technical play this deserves a short term move to the upside so I will watch closely and might initiate a position on the long (BUY) side in the next 7 days. Already have a buy limit in at a lower price in case I sleep in or forget to check it for a few days.

Update:  RIMM has Earnings on 6/16/2011 Afterhours

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Nothing to see here…aaand we’re baaack!! :)

Posted by K on June 14, 2011
General / Comments Off on Nothing to see here…aaand we’re baaack!! :)

 

If you take a look at the archives to the right you will see that the months of at least half a dozen posts came to a halt in June 2010 when I set off for a nearly 2 month vacation in which time I tried my best to cut away from the World Wide spider Web.

Upon returning, life took its toll and between juggling this, another part time gig, an internship, school and more I was spending over 14 hours a day even most weekends trying to run it all but eventually it was either my health or a few of my favorite things (such as investing and this blog) and thus began the almost dry run of no investing and no blogging (well almost none) from my return late August 2010 until now June 2011 where I have taken a part time gig into a full time Business and have eliminated the fluff.

I have made several attempts at coming back committed to the blog in August then September and continuing almost one post or so a month until it just wasn’t worth making half-baked posts.

Corporate America is behind me for the time being and even though it was fun, having more time to focus on what makes me happy is a much better trade-off. I do lecture a Special topics class on investing at my University and therefore I have decided to create a “investing school” section in the blog which I will update with useful info for beginners. I know the page is blank right now but a few articles are written which I will be releasing slowly every few days in case i fall into a dry spell again.

To those that are still subscribed via RSS, come from referral sources or even have the site bookmarked and stop by I would like to say THANK you for hanging around while Investingfreak took time to “restructure”.  The website has also been redesigned with the Green Money colors and with the simplicity in mind.

 

As always the moto or Mission Statement for us is:

“See it, Call it, Trade it, Bank it” -Investing Freak

 


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Execute Smarter trades by utilizing market internals and core sectors.

Posted by K on January 10, 2011
General / Comments Off on Execute Smarter trades by utilizing market internals and core sectors.

The following is meant to serve as a guide on how to use market internals to gauge the market when day trading. That being said, the core sectors mentioned below can be used on longer timeframes such as Daily and Weekly to gauge the market direction for the main sectors of the market. As always, keep in mind that what works for one trader (me) might not work for you.

Update: As of July 2011 Brad is back at shadowtrader after taking a break so go listen to him daily if you have thinkorswim.
I initially came to learn about these core sectors and market internals while on ShadowTrader chat that was moderated by Brad Augunas before he was replaced.  The ShadowTrader core index can be accessed to those of you that have a thinkorswim account and have the desktop software installed. Once that is taken care of you can click on “Market Watch” tab, then click on “Watch” and finally Scroll through the “Public” section until you reach “ShadowTrader Core Sectors”. If you have done it correctly you should see a screen like the one below.

Before I move on to the core sectors I want to point out the top right corner of the screen above. This is where the Advancing and Declining sectors are summarized.  So far I have only used this for the benefits of intraday but I will test out the theory that it can also help with long term market prediction. How Brad would summarize this is “The Sectors are 12-4 negative”

The volume shows how much volume goes into the advancing sectors and how much is going into declining sectors. 12,567,261 shares were going into Advancing sectors and 158,799,054 were going into declining sectors. With some quick division we are “12.6 to 1 negative” meaning 12.6 times more volume is going to the downside.

Finally the capital flow is also fairly important in seeing where the money is flowing and when, here we have $37,931,394 on the Advancing issues and $367,886,885 on the Declining issues, therefore another quick division leads us to the “9.7 to 1 negative” which means almost 10x more money is going to the downside.

By gauging these internals you wouldn’t want to get in front of the Bear train unless you saw a change in internals right? Here is an example in the chart below.

As you can see from 1:30-4pm the Sectors moved from 12-4 (or 3-1) negative to neutral (1-1), the volume went from 12.6 negative to 7.3 negative (an improvement) and the capital flow which was almost 10-1 for the bears dropped to about 2.5-1 negative (more money was being thrown to the upside) so if you were day trading it would have been wise to reverse or exit your short positions.

At 12:45pm on Friday there was the most picture perfect Bull Hammer Candlestick pattern which should have been plenty to signal a trend reversal, but the internals helped confirm it.

If you don’t have access to thinkorswim I cannot find another way for you to gouge the market internals but I will link the16 core sectors chosen by ShadowTrader. They can be used intraday to gauge the strong or weak sectors or they can be used to view the long term direction of a certain sector by being graphed into daily or weekly charts.  All the links below point to StockCharts.com

  1. $DJUSHB (Dow Jones US Home Construction Index)
  2. $DJUSIT (Dow Jones US Industrial Transportation Index)
  3. $DJUSNS (Dow Jones US Internet Index)
  4. $DJUSSW (Dow Jones US Software Index)
  5. $BKX (Bank Index – Philadelphia)
  6. $BTK (Biotechnology Index)
  7. $DRG (Pharmaceutical Index)
  8. $GOX (CBOE Gold Index)
  9. $HCX (S&P Healthcare Index)
  10. $IUX (S&P Insurance Index)
  11. $OSX (Oil Services Index – Philadelphia)
  12. $RLX (S&P Retail Index)
  13. $SOX (Semiconductor Index – Philadelphia)
  14. $UTY (Utility Index – Philadelphia)
  15. $XBD (Broker/Dealer Index – AMEX)
  16. $XOI (Oil Index – AMEX)

I am attaching a final chart here which includes all 16 minicharts and I hope you don’t get too dizzy staring at it. Click the Image to Enlarge.

I wish you all the best in using these indicators and I always welcome questions and new ideas so don’t be shy to plop them down on the comment box below.

Happy & Profitable Trading,

-K

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A Tale of two Companies: Netflix ($NFLX) and Blockbuster (BLOAQ)

Posted by K on December 08, 2010
General / 5 Comments

If you are reading this blog that means you are part of the online revolution which has sped up the way we conduct business and also the way we spend our leisure time.
The recent years have brought user generated videos, tv episodes and even full movies to the web. Gone are the VHS and DVD days where it cost $6-7 to rent a movie and in are the $10-15/month to watch unlimited movies. The company that revolutionized this was Netflix a few years back and that caused dear ol’ brick and mortar Blockbuster to go belly-up.

Well Gentlemen and Ladies the beast is awakening from its two year sleep. In what might turn out to be a lengthy blog post I will be evaluating both Netflix and Blockbuster because in another week (December 15th) Blockbuster is expected to file its reorganization plan.

Lets start with Netflix $NFLX king which Since January 2010 alone is up a whopping 245% from $55 to $190 a share. Being a technical analysis freak I always look at the chart to see how the stock has done in the past and whether its shot up too far from the ground (my moving averages trio) and as you can see below the real ground is the 110 ema which right now stands at 151.37.  I also use two shorter term averages in case I don’t want to wait for a stock to go that low but with Netflix being $40+ above ground I am willing to wait. (Click Image to Enlarge)

Sure sure technicals are one thing but I also like to look under the hood at fundamentals. I plug balance sheet, income statement and other data into my system and what I get is an all in one visual of different ratios.  The profit margins have increased over the years and that is a positive thing but Netflix’s equity multiplier has increased from 1.78 to 3.41 which is basically doubled within the year and that signals to leveraging, all the profitability ratios are also good, but when we get to Liquidity ratios such as current and quick ratios we see a different story, Netflix has become more illiquid for better or worse. Lastly Long term debt to total assets has gone up significantly from 6% to 35% within a year so that might be a warning shot.  And Finally the past few day Netflix has been under the influence of mostly negative news and especially tonight’s after-hours news of its CFO  “retiring”.

Netflix receives a score of 57% (out of 100 of course) based on my hybrid system of technical analysis, fundamental and news and on we move into Blockbuster.

When was the last time you heard about Blockbuster? My educated guess would be around 2007 when they stopped advertising (started going belly-up). Well I do have some news for you and the news is that the Yellow and Blue logo is making a comeback but first lets keep the layout somewhat organized (neat freak) and start off with a chart.

Below is a chart using the exact averages as above but this one isn’t as pretty and Blockbuster (BLOAQ) former $BBI  has been “under ground” for quite some time. Even with the recent doubling of its price from 5 cents to 10 cents the ground hog hasn’t been able to stick its head above the 12 cent ground for long. Back in May the ground hog (Blockbuster) poked its head, didn’t see a shadow and that resulted in 6 more months of winter. So technically speaking, 12 cents has to be broken before the stock goes anywhere gooood. (Click Below to Enlarge)

Just because Blockbuster stock is yet to break out, that doesn’t mean that the company isn’t making steps into a re-emergence from bankruptcy. As mentioned in the beginning of this article Blockbuster should be submitting its plan on December 15th, meanwhile they have just closed 18 more physical stores in a move from offline to online media.  For those of you that like purchasing dvds at a physical location, NCR Corp operates RedBox-like kiosks with Blockbuster logo and movies. Tests on about 900 kiosks are being run now in San Francisco, Miami etc to see if people would pay $3.99 for the first night to rent a new movie 28 days before it comes out to Netflix. Going into bankruptcy it had $1 billion in debt and coming out it is expected to have $100 million or less.

Just a few weeks ago Blockbuster received court approval for $20 million in advertising, it had not advertised since 2007 and they have already begun with a few ads showing their competitive edge of providing movies 28 days earlier than Netflix the ad campaign is called “Less Waiting. More Watching.
Another thing i noticed  while looking website statistics and info is that when you search “new releases” on Google Blockbuster.com is #3 ranked and Netflix is #10.
Ok so why would I (or You) as a consumer want to pay $11.99/month for the 1 Dvd plan when Netflix is $9.99/month right now?
Well there is a big reason why I highlighted “right now” because it is the main reason Blockbuster is the only one to offer movies 28 days earlier since it costs $3.99/movie.

With Netflix’s recent fame in the stock market more companies such as the movie studios will want to suck more money out of them and they (Netflix) will pay higher prices for the movies. At this moment either Net profit margins will begin declining if the $9.99 price is still valid or Netflix will be forced to charge $10.99, 11.99 12.99 etc and that will drive users to other competitors since the price advantage is no longer valid.

With the new campaign, Blockbuster’s ad spending next month is to be three times as high as it was last December. The final month of the year is traditionally one of the most lucrative for the company, as summer event movies come out on DVD and families watch movies together over the holidays.

I will leave you with Blockbuster’s new ad campaign that came out less than a week ago.

What a crook I would be if I didn’t disclose my holdings. Short NFLX via option puts and long Blockbuster.

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Investimonials Inspiration for InvestingFreak

Posted by K on December 06, 2010
General / Comments Off on Investimonials Inspiration for InvestingFreak

I would like to take a few short minutes to Thank all the Freak-y readers for their support.

You can check out Investingfreaks’ Investimonial page and leave a review for others to see so we can get more visibility.

There are currently two 5 star reviews and one email from a reader that found us through investimonials as well.

Here are what is being said about this blog.

Danny:  “funny, sharp, witty blog and really timely notifications”

the creator of this blog warned his subscribers to be extra careful a couple days before the flash crash! check it out. go to the website and go back to may 6th and before! its a really funny blog too.

theres a nice little community of sharp traders at investingfreak. they share their trades and other speculations. really cool site, i love it

Tommy: “I bookmarked this site!”

This blog is great. The few traders that write for this thing are on point and comedic. That really helps keep the reading light and interesting. I wish they updated the blog more, but with all the market action that has been going on since the start of September. I can’t blame them for that. When you find guys that are willing to share great information, take advantage of it.

Fetcher (via email)

You have to know that I truly enjoy using your blog. it’s very useful and really effective tool for everyone! Actually I found it via investimonials.com, according to it your blog has few reviews but I think your blog deserves to be rated higher. So it would be a big step to ask your readers/visitors to leave reviews in investimonials.com.

Again I appreciate the voiced opinions because as much as I ask for comments in order to improve the site and content many just don’t want to be bothered and pitch in.

One last thing is an update and apology. The last blog post before this was back in October and that is unacceptable but as Tommy mentioned about the market he is correct. (By the way I am long Blockbuster $BLOAQ, a January 165 Netflix $NFLX put which I acquired when Netflix was up at the $205 area a few days back)

I should begin posting more in the next few weeks. But if you are a reader you are urged to go to investimonials.com and write a review if you have something good to say. 🙂

-K

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When ETF’s don’t work ($VXX, $VIX)

Posted by K on October 26, 2010
General / 2 Comments

We are all caught up in the new bubble that I would like to call the Great “Enron Task Force” (ETF).

Basically ETF’s are usually set up to mimic indices that we cannot directly buy. That is a great way to stay invested and diversified if you believe the stock market in general will do good or bad. The number of Enron Task Forces is now reaching the gazillions and “investors” are so drawn into them that they are getting bigger and bigger and bigger (can you guess already?).

Here is SPY ETF compared to the index that it tries to replicate. (Click To Enlarge)

As you can see the mirroring effect is almost so perfect that by owning SPY shares you will make nearly the same percentage as how the S&P 500 has performed.  Thats GREAT! It takes pain away from doing individual stock research. Of course if you still want to invest in specific stocks with minimal effort and AMAZING returns I would recommend Bear Sterns.  After you have made millions in Bear Sterns get your attention back to this useless post.

Hey I have an Idea! I believe Volatility will increase and VIX index will keep going higher again. Hmm “Google Google on the wall whats the best ETF of them All?” Google: VXX for the win!   So there you have it, if you want volatility there is an ETF for that.  Alright time to cut to the chase because its nearing midnight. Click Below to Enlarge the Comparison between VIX and VXX.

Notice a Difference between the SPY comparison and the the VXX comparison? Gosh I hope so or get the FREAK out of here!  They don’t mirror each other AT ALL. They Barely did before last august and from then on its a whole different story. Speaking of stories… Thanks Dan for the heads up in the comments about the “VXX Reverse Split 1:4” story.
For those that are new to stock splits a quick search can yield a lot of information but I will spare that for you by explaining in my own words what will happen here.
When VXX reverse splits in the first week of November (lets assume its at $13 on that day) it will start showing up as a $52 instead. How can they just change the price? Well If you owned 4 shares of VXX now you will own just 1 later thats how.

Ok finally getting to the finish.  A reverse split is bad because instead of increasing the amount of shares outstanding, the company is making this move to make the stock look like it has more value when in fact is the same crappy thing.  I will not be playing VXX but seeing the “oh so perfect” mirroring effect it has done so far I congratulate those who will keep shorting it via whatever method works for them and reaping profits until VXX slashes in half once again.

Thats it for now and I hope that helped clear your question Dan.  Volatility will not get a spark just because Barclays “Enron Task Force” will have a “higher price”. If you’re still confused or stumble upon other interesting things that you would like to share, the boxes are right below the post most of the time.

Happy Trading all and to all a good night!

-K

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Existing Home Sales Plunge, Unemployment to do the reverse

Posted by K on August 24, 2010
General / 4 Comments

Existing Home Sales which are more important than the new home sales data plunged over 27% year over year, the amount of sales was the lowest since 1995. At the current pace it will take over 1 year (yes 12+ months) to sell the existing houses out there.

People have begun losing their jobs once again after a few months of lowering unemployment claims. How do I back this up? No data other than I now have more than one close acquaintance that within the next 2-3 weeks will receive a pink slip. They survived during the worst of it all and now employers are deciding its time to let go. Thats amazing! Keep your profits because you wont be making as much money in the future with 15% of the american workforce unable to afford staples such as bread without a food stamp.

On the currency front according to ZeroHedge

And once again, all of Europe is dumping its deposits in Switzerland, running away from domestic banking centers, and making the lives of Hungarian CHF-denominated debtors a living hell. The EURCHF just hit an all time low of 1.3066. The Bank intervention sonar just went apeshit as both the BoJ and the SNB are fully expected to intervene at any moment.

Technically Speaking? See for yourself how the market has acted recently especially since I officially returned from break August 6th.

K- August 6th, 2010
vacation just ended today so it will take me at least a week to slowly get the groove back. be patient this time…

Euro/Usd and SPX have been in a water slide since.  Its hard getting from Information overload mode to 2 month no internet and back to information overload so I tire out by all the information I once processed in a usual day so the recovery process puts me on tract to return trading right after labor day and the Special chart that hasn’t been posted here in a bit as well. (Click to Enlarge)

Happy Trading and make money trading not listening to baldies at CNBC unless he entertains you and the advice isnt followed. 🙂

-K

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The Perfectly Timed Vacation

Posted by K on August 08, 2010
General / 9 Comments

It’s been six weeks and the stockless and unwired vacation has wound down. To my surprise I see that BP bottomed right when I covered my July puts at a profit and since its nearly 39% up. Euro went from 1.22’s to 1.33’s and so on. Its time for me to find the reigns and take control of the market once more.

It will be a week or two until I get my trading groove on but for now i’ve updated the Current Pick’s page on top.
here are the main indices.

Market Indices

Symbol Description Buy Date Sell Date
$SPX
S&P 500 INDEX
7-7-2010
SPY
SPDR S&P 500 ETF
7-7-2010
$INDU
Dow Jones Industrial Average
7-7-2010
$COMPX
NASDAQ Composite
7-8-2010
QQQQ
PowerShares QQQ (ETF)
7-8-2010
IWM
iShares Russell 2000 Index (ETF)
8-6-2010

Hope its been a profitable 100 point market move for my fellow readers and here’s to more fun swings to come.

-K

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