Let me say a couple of things up front before I get into the details about the three stocks mentioned in my title. I am not recommending these stocks as investments, as you all know, but I am following them on a daily basis. They fascinate me and in this blog I will tell you why.
Secondly I wanted to talk about other investment strategies other than “Coming Out of the Blue” that may interest my readers. Don’t get me wrong, “Coming Out of the Blue” is one of my favourite investment strategies and I use it often. However I do employ other investment strategies that fit my personality and the amount of time I can spend looking at a quote monitor.
Another very profitable investment strategy is looking for catalysts in a specific company or industry and using model price charts to pinpoint entry and exit points for profitable trading. What kinds of catalysts do I look for? A new CEO in a moribund or struggling company is one. Maybe a new industry is being discovered like social media and marketing. Or maybe technology is changing the dynamics of pricing and cost structure in an industry or company that will drive future profit growth where none existed in the past. (The three companies selected each have a different catalyst at play.)
Again, I’m not looking for a quick buck here! Sometimes catalysts can take many quarters or years to play out. The critical point is how do you know you are on the right track with your investment? Keeping an investment, often times for years, an investor or trader needs feedback – for me constant feedback – that the catalyst in play is still working for a positive rate of return expectation in your portfolio.
Model Price Theory (MPT) and charts allow you to observe the dance between improving fundamentals and stock price on a daily basis giving an investor/trader feedback you are on the right track – the money track. This dance is what I call an “investment campaign”.
And believe me, I love campaigns!
To conclude, couple themes together like a major turnaround catalyst with a company or industry with a low valuation – low EBV level – brings together several ingredients necessary for major rates of positive return. All an investor or trader needs is the patience to hold the position over a lengthy period of time. By using Model Price Theory (MPT) and our model price charts during one of my campaigns gives me a comfort level that I’m on the right track with important, relevant feedback over a lengthy period of time.
So with this lengthy preamble let’s talk stocks!
Yahoo, Inc. (YHOO)
The Yahoo story is a corporate turnaround by a CEO who I believe gets “it”. I have already written two blogs on Yahoo, here and here. I have already professed in my first blog on Yahoo, back on August 21st, 2013 that I am a fan of Marissa Mayer and I have been watching our model price chart on Yahoo with keen interest for over the last year.
So let’s have a look at Yahoo’s current model price chart.
Yahoo, Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of YHOO subsequent to this post will be maintained on Facebook, here.
What am I watching on our Yahoo chart through our Model Price app?
For the last seven weeks the stock price has been pounding away at EBV+4. I like this! It’s like coiling of a spring. Energy is being captured and stored. At some future date this energy will be released driving the stock price higher – I’m talking high probability NOT certainty. This same current situation occurred back in July/August – see arrow annotated in the above chart – where the stock price spent eight weeks following along our calculated EBV+3 (Red Line). After this eight week period Yahoo shares spiked upward taking only three trading weeks to achieve EBV+4.
A good CEO leaves a fingerprint of Model Price math that propels a company’s stock price and valuation higher. Marissa Meyer is doing exactly this. My hypothesis is Yahoo, Inc. shares will be much higher a few years from now with Ms. Meyer at the helm. The current interaction of Yahoo’s stock price and model price math is confirming my hypothesis over the last year and I am fascinated of what the future holds for both Ms. Meyers and Yahoo.
Micron Technology Inc. (MU)
First off, I know nothing about D-RAMS. I know nothing of what a D-RAM is, nor nothing about D-RAM pricing. Yes, Sargent Schultz!
But I do know supply and demand. Micron is a cyclical like gold, materials and oil stocks. What I see in our model price charts are analysts constantly increasing earning estimates for this company. My suspicion is that after 13 years of struggle and hardship for shareholders, the company may have finally found a sweet spot of product pricing, costs and lack of competitive pressure.
Let’s have a look at Micron’s model price chart
Micron Technology, Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of MU subsequent to this post will be maintained on Facebook, here.
As you can observe Micron’s calculated model price has gone from around $4 in March to the current $32. This meteoric rise in model price is as a result of the substantial increase in actual and future possible earnings estimates. Again the last time something like this occurred was back in 2000, when Micron peaked out at EBV+7. What is the share price value of EBV+7 with Micron’s last updated balance sheet? We calculate EBV+7 at $83.62. Again, I not saying Micron, the stock, is going to EBV+7! However there is a probability.
I have also included a long-term model price chart of Micron Technology for your reference.
Micron Technology, Inc. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)
As you can observe our model price calculation has never been higher since 2006.
Pitney Bowes Inc. (PBI)
Let’s first observe the long-term model price chart of this company.
Pitney Bowes Inc. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)
As you can see the EBV lines slope downward initially and then somewhat flatten out with jagged EBV lines. Yes, they look crazy, compared with the typical smooth, upward sloping lines of a “normal” company in our model price database.
What is going on here?
The management team along with the board of the company decided to zero out or return the shareholders equity of the company to its shareholders back in 2008. Slow growth/no growth companies do have this option, as long as their revenue stream is somewhat dependable, of returning the equity of the company to shareholders by way of share buybacks. By shrinking the balance sheet of the company (equity), rates of return on capital jump materially. Increasing rates of return on capital and our calculation of convexity – see Key Concepts – our model price calculation increases.
Looking at our short-term model price chart
Pitney Bowes Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of PBI subsequent to this post will be maintained on Facebook, here.
Observables for the above chart
1. Yes, our calculation of model price is below the current stock price but our model price calculation is based on adding 4th quarter mean earnings estimates to the September balance sheet – the last updated balance sheet. As you can observe this has an impact of an upward slopping EBV line from the end of September – see annotated up arrow on the above chart. We cannot know how many common shares management will repurchase during the future quarter thereby flattening our EBV lines. So I anticipate additional share buy-backs having a positive impact on our future calculated model price line.
2. Valuation of PBI is at EBV+8 and I agree this is high. As all my blog readers know I do prefer lower valuation companies. But as I said previously, PBI has no shareholders equity in the company. With a low or no shareholders equity this makes the valuation of the company very high.
3. There are mathematical limits according to Model Price Theory (MPT) in terms of management reducing the size – assets and shareholders equity – of Pitney Bowes’s balance sheet. Limits can also be reached in terms of the amount of debt the company can carry under normal business conditions. Any internal company specific or external economic shocks could be fatal as the company’s resources and possible room to maneuver financially is very limited as the company presses on with this course of financial engineering.
Having said all the above you are watching financial engineering dynamic in its early stages. Financial engineering performed correctly can be very profitable for investors over a period of time.
So I have these three stocks on my quote screen watching them intraday whenever possible. Three stocks, three separate financial catalysts which model price math can trace through the feedback of the stock price on our model price charts and keep me on track holding these investments for the long-term.