Some Summaries from week of 4/19/15 – $TSLA, $MSFT, $AMZN, $QCOM

Tesla Price Targets Pull Away From Profits: a classic example that momentum stocks really trade on fictional earnings reports. They’re irrelevant, til they’re not.  $TSLA (218)

Wall Street Journal graph of TSLA earnings projections

 

Amazon Reveals Just How Profitable the Cloud Can Be: by Tiernan Ray.  Ultimate conclusion is that Microsoft’s Azure is doing well too.  Which would you rather invest in, $MSFT (47) or $AMZN (445) a cloud provider in a hugely profitable if diminishing cash cow or one “trapped in a retailer.”  Unresolved: is Azure a function of that dying business of companies running on Windows?  Microsoft got other loving mentions in Barron’s as well from the usual spreadsheet watching crowd.

A Recharge for Qualcomm.  Can Jana partners get $QCOM (68) to split off the licensing from the chip business?  This is an article very related to the above MSFT & AMZN discussion so far as shareholders are concerned.

Let’s Take a Short Ride, a Heard on the Street Column from April 18-19 suggested the desirability of a strategy as follows:

bet against the 10% of stocks with the highest days-to-cover ratios, and bought the 10% with the lowest…it would have fared from the start of 1988 to the end of 2012.  The results: a return of 2,917%–almost double the total return of the [DJIA].

 

Shorting high-day-to-cover ratio WSJ chart

 

Tale of Three Once and Future Dividend Providers, April 1996 to present

Investor return can come from appreciation, or dividends.  Microsoft (MSFT 31) announced this week the quarterly dividend will be raised to .23/quarter, going ex-dividend November 13.  It yields 3%.

I thought this would be interesting to compare to GE as classic growth stock, and Altria as a “high dividend payer” from the same approximate time.

If you’re even vaguely familiar with the market you’ll know MO & its descendants are going to come out ahead on total dividends, but what about total appreciation as well?

MSFT:

Microsoft paid a $3 special dividend in 2004, and has paid a dividend since 2003, starting at a humble .08 for the year.   In the fiscal 4th quarter of 2004, the dividend went quarterly at .08.   The dividend is unlikely to triple in the next eight years — for one thing the payout ratio has gone up.

It will have paid a total of $7.02 in dividends.  For those long term holders, this means if you bought in April 1996 congratulations you’ve just (before taxes) recouped your investment — of then a maturing company ten years after its IPO.   (This was a full two years after I made the worst investing decision of my life, selling the little America Online because Microsoft was coming to get it.)

Chart forMicrosoft Corporation (MSFT)

The classically safe large cap growth stock, GE, traded at 14.4 in April 1996 (now a humble 22, but probably a touch undervalued.)

GE has had their ups and downs of dividends, cutting it notably to .10/quarter in the financial crisis.  From the summer of 1996 you would have had $11.57 of dividends from GE (Genworth shares appear not to have been spun out to GE shareholders, but had some dividends they did.)

Chart forGeneral Electric Company (GE)

MO:

Phillip Morris a.k.a. Altria is the classic dividend stand out.  You would have made your $34.6 investment back in Altria dividends alone, $35.06 since the summer of 1996, but there is also Kraft and Phillip Morris International which were spun out in 2007 and 2008 respectively.

Each MO share got .692 of a share of KFT which has generated $6.51 of dividends, for $4.51/share.

Each MO share got 1 Phillip Morris International PMI share, which has delivered $11.35 of dividends.

$50.92 in total dividends of MO and its two major spin offs in the same time.

Chart forAltria Group Inc. (MO)

Chart  for Kraft Foods Inc. (KFT)

Chart forPhilip Morris International, Inc. (PM)

For total return calculation purposes you’re still ahead with Microsoft, but barely.

You’d have approximately $150 per share from that $34 investment, 440% price appreciation that is nearly identical to Microsoft’s, with higher dividend return!

I did hold MO, PM and KFT in a retirement account — to avoid the dividend taxation for a number of years, and reluctantly (and foolishly) sold to go into TBT instead.  Is the next MO…MO and its heirs?  Buy and hold is tough for me to stomach but when the right stock is found the results are spectacular.  MO was the classic poster boy for Jeremy Siegel’s The Future for Investors and it has held since the books’ publication.

Yield-hungry investors have piled into stocks like MO and PM and I think I will wait for a drop to get back in.

 

Large Cap Tech LEAPS on August 31

The following is a list of the current base prices of AAPL, GOOG, MSFT and a few others for comparison including a possibly interesting play with HPQ as well followed by various January 2014 calls.

The mathematical dissection of which options have the best value compared to expected volatility I don’t think gives much of an incremental advantage in selection.  I’ve chosen for example 100 point increments in the strike prices of similarly priced GOOG and AAPL which demonstrates a bit more expected volatility in Apple than Google.

Apple, Google and Microsoft are in the very unusual situation of having immensely strong technological positions and insane amounts of cash.  Hewlett Packard anyone else with a scent of exposure to the PC market (DELL obviously) is also trading at historically low P/E ratios.  It is hard to imagine situations outside the more dire macroeconomic scenarios where both of these companies emerge as big losers (though a re-elected Obama administration that steps up taxation and doesn’t enable a repatriation of foreign cash holdings is sufficiently dire for them to wildly appreciate.)  The asymetric upside is good growth and increasing P/Es could lead to one or both doubling.

Of the three I would feel most comfortable with GOOG as a buy-and-forget play now which is of course an option.  Their market lock in feels strongest with the most innovative (most productive?  We’ll see) R&D and promising new fields to come.

One another play would simply be to get NASDAQ 100 calls.  The grossly undervalued large caps included the above named as well as CSCO and QCOM add up to approximately 50% of the index, though you get BIDU and WYNN and other plays that are not as salient to the thesis: do you feel lonely in the QQQ, Kraft Foods?   There are a number of companies in the index such as Amazon (3.5% of the index and IMHO grossly overvalued) The QQQ closed at 68.16 today; this idea train has already left the station this year but probably plenty of track ahead:

Chart for PowerShares QQQ (QQQ)

This looks a touch ahead of itself going into a volatile September; still, QQQ Jan 14 LEAPS now:

70 – 5.92

80 – 2.29

90 – 0.63

100 – 0.13

This strategy would have fallen short in companies like Microsoft and Oracle and others in the lost decade of stocks 2002-2012 but as the economy generally picks up and if Europe were to return from the brink would pay off big.  For my current positions short S&P if there is a steep downturn in September I would pull the trigger on a strategy such as this.

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