Monthly Archives: July 2012

Just a Reminder – I’m on Market Call today!

I will be on Market Call on BNN (Canadian Business Show) for a full hour 1:00 pm – 2:00 pm (eastern standard), July 31, 2012.

RONA Inc.(RON)–One of My “Diamonds’ in the Rough” Received a Bid!

Buying cheap stocks, so called value plays, can be fun and profitable.  This morning the investment public was made aware of a takeover bid made on July 8, 2012 for Rona shares.  Lowes Cos. (LOW) made a takeover bid for Rona at $14.50 Canadian dollars per share.

Back on March 1, 2012, I highlighted two Canadian stocks that I called Diamonds in the Rough?  You can read the post here.  The two securities were Rona Inc. and Dorel Industries.

Rona (RON)

I have reproduced our RON model price chart, which I included in my blog, on March 1, 2012.  As readers can see, Rona was hugging our EBV-3 line, using this line for support.  What caught my eye was the breakdown into EBV-3 and subsequent recovery (November).  This is what I call “breaking out of the blue”.  I have written many times of this investment strategy and its’ profitability.

Here is our Model Price chart for RON as at February 29, 2012.

Rona Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Evaluation of Lowes $14.50 Bid

Let’s start with last night’s chart.

Rona with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of RON subsequent to this post will be maintained on Facebook, here.

As you can see from our model price chart, we have a model price, which is our fair market value, of $18.60.  Next year’s model price is calculated at $20.08, which appears in our database and not on the chart above.  Lowes offer is low, and the Board of Directors was right to reject the offer.  In my opinion, Lowes would need to offer at least say $22 a share, which would be at EBV+2, in order to get this deal done which would be a slight premium to our calculated model price.

Well, lets’ see what happens.  Since my blog on March 1, RON shares will be up some 50%!  (Assuming, shares of RON trade at $14 on the open, with the $9.37 cost on the date of my original post).

New Facebook Balance Sheet (B/S), Last B/S Published in this blog was in Error!

It happens.  I wanted to see the new Facebook Model Price chart in a hurry.  When Facebook reported their earnings on Thursday night, we manually input the data on Facebook for the Thursday night computer run.  So on Thursday night and Friday morning I have a new FB chart to blog about.  The chart we produced is reproduced below.  This chart is in error.  Not sure what happened but I will get to the bottom of it on Monday morning.

Here is the Facebook chart in error.

Facebook with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

The automatic download occurs usually the following night after the earnings release, in this Facebook instance, on Friday night.  So without a manual update we can be a full trading day behind on a specific chart during “earnings season”.  Most of the time it really doesn’t matter, however in this Facebook instance it really did matter!  My apologies in not getting the chart right the first time.

Here is the new chart on Facebook.

Facebook with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of FB subsequent to this post will be maintained on Facebook, here.

My New Observations on the New Facebook Chart

I was shocked in my previous blog on Facebook (FB) that FB broke EBV+5. As you can see from the new chart FB has yet to break EBV+5.  This is good news for FB investors.  Irrespective where model price is, EBV+5 should become a strong area of support for Facebook.  As you can see from the new chart above this area of support is $21.48.

Much, which I have written in my previous blog on Facebook I wouldn’t change.  If FB were to break EBV+5, than lower levels are probable. However, I would state that my capitulation trade and my point on price consolidation CAN happen at the EBV+5 level.  Yes, EBV+5 can be that strong a support level!

Anyway, sorry for the error.  Even though our work is very data intensive, and we are crunching millions of pieces of data, data errors are very unusual.  Or errors are usual when humans are inputting the data!

Facebook (FB) – What are Investors to do? How do you value FB shares? Where are FB shares going? Some Answers!

Reviewing the Twitter feed last night of people listening to the Facebook conference call was filled with frustration.  Analysts’ didn’t seem to know what to ask and management didn’t want to answer any questions to give nervous investors calm.  Facebook will not give any financial guidance and Zuckerberg himself giving listeners limited insight into his plans for the company’s future.

What are investors to do?  How do you value this company?  Where is this stock going?

ModelPrice Guy has some answers.  How? 

Facebook has a balance sheet!  Investors can use EBV levels to determine support and resistance price points.  How can we do this?  See our “Key Concepts” tab for information on our unique approach.

Here is our model price chart as of last night’s computer run, with Facebook’s latest financials.  Our pricing only includes last night’s close at $26.85 and not the after hours price.

Facebook with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Erratum:  The above chart is in error.  See correction blog here.

For those interested, a daily updated chart of FB subsequent to this post will be maintained on Facebook, here.

On Thursday’s night close you can see FB resting at EBV+5 before the earnings were released.  Subsequent trading after the earnings release saw FB shares fall sharply, which we call a negative transit through EBV+5.  At the time of writing this blog, FB shares are trading down over 14% or $3.90 from last night close of $26.85.

With FB transiting down through EBV+5, the next area of support will be EBV+4 or $19.64.  Personal experience has taught me that EBV+4 is not very robust a level of support.  (Keep in mind I have been using these charts for well over a decade.)  So this leaves us with EBV+3 or $15.71 as a possible support level.  (Yes, EBV+3 is more robust a level than EBV+4.)

Trading Considerations I would have knowing Model Price and Facebook fundamentals.

1.  FB broke EBV+5.  This is big.  I quite frankly thought EBV+5 would hold.  Maybe after this spike down in price FB would recover back up to EBV+5.  This would be the only potential positive I would see in this situation.  If FB were to recover to EBV+5, then this will become support for FB for quite sometime until investors and management get use to each other.  So if you are currently holding FB shares this would be your upside – EBV+5 or $27.12.

2.  Capitulation trade has yet to happen.  You can see in our price chart, both private and public transactions that nobody has made any money on their FB positions since the beginning of the year.  This “over hang” of stock must be cleared out.  Investors must give up!  Selling positions at whatever price.  In my view this has yet to happen and is a worrying position for current holders of FB shares.

3.  FB needs to spend some time somewhere to consolidate its’ price action.  Strong hands need to take over the pricing action.  This will happen at one of our EBV levels.  At what level will this happen?  EBV+5, EBV+4, EBV+3 or EBV+2.  I don’t know, but I will know it when I see it.

Conclusion

So there you have it, my assessment on Facebook.  The way I look at this situation, the traditional fundamentalists’ are lost using P/E’s and price to book metrics, the technical guys have nothing other than their 5 minute tick charts but there is a third way.  The Model Price way, using a combination of balance sheet information (the only thing investors’ know is real) to derive EBV lines along with earnings and balance sheet metrics to determine model price (fair value) – less relevant in this situation.

So to be clear, I would be using our EBV lines for potential upside and downside metrics for my trading.  Transits, whether upside and downside will give traders important information on where FB shares will be trading in the future.  In other words by using our EBV lines there will be mathematical structure to the way you trade and invest.

Teck Cominco Reported 2nd Quarter Earnings – What Now!

I wrote this back on May 15, 2012, see original blog here,

Certainly TCKB can be considered a bell weather stock and I’m always fascinated on what TCKB is doing.  As you can see on our model price chart, TCKB has broken through EBV, which we calculate at $32.29.  We highlight TCKB, breaking EBV back in October.  Observe the weekly price bar of TCKB when the stock broke EBV back in October.  You can see the volatility, and the close for the week was half way through the zone.  This is typical of high profile stocks making a negative transit for the first time.  The second transit, which is just occurring, usually happens with a whimper.   Some would call it resignation or defeat.  THIS IS NOT A GOOD SIGN.  We would take this as a signal as lower prices for TCKB is ahead.

Remember no recommendation here, just a high probability event.

This is the model price chart I included with the above commentary at the time.

Teck Cominco with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Just like poker players all stocks have tells.  Unconscious signals that tell opponents what the player has in his/her hand.  Did anyone notice Teck Cominco’s “tell”, except for ModelPrice Guy.  Did any analyst tip you off?  Did technical analysis give you a hint?  Just asking!

So “Smart Guy” what happens now?

First, let’s review TCKB’s model price chart as of last night.

Teck Cominco “B” with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of TCKB subsequent to this post will be maintained on Facebook, here.

As you can see, TCKB tried to “hold on” to EBV since mid-March.  For 10 weeks TCKB struggled to keep its’ head above water, or its’ EBV line.  News about TCKB’s, 2nd quarter earnings was enough to tip the balance for lower stock prices.

So Where Does TCKB find support?

Ultimately, I believe TCKB will go to EBV-3 or $18.82 (using Teck’s second quarter balance sheet).  This may take some time, maybe only a couple of quarters, maybe next week, who knows.  Yes, I know there are two more levels, between TCKB’s current price and EBV-3.  These, EBV-1 and EBV-2, levels are usually not that strong in terms of price support as EBV-3, especially “well liked” equities moving downward.  This is just my experience of using model price charts for over a decade.

And The Good News!

These “cyclicals”, like TCKB, will become very interesting from a valuation point of view.  As the investment community and investors are going after yield, at any valuation, big discounts are appearing in equities, such as Teck Cominco, that are economically sensitive and usually non-dividend paying.

I will keep you posted!

Netflix (NFLX) Reports 2nd Quarter Earnings – What Now?

For those readers new to my blog, I have written two major pieces on Netflix.  I have provided links to both pieces here.

Netflix – Three BIG questions (and answers) about Netflix

NFLX – Two Big Problems for the Bulls on NFLX!

Here is the new model price chart including 2nd quarter financials on NFLX

Netflix with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of NFLX subsequent to this post will be maintained on Facebook, here.

Here is what I said in my first blog on NFLX on January 30th, 2012

Just for fun we will make this prediction!

The more interesting question is what happens when NFLX transits downward through EBV+7.  If and when this happens we think NFLX will find a more comfortable home at EBV+5.  So when will this happen?  We don’t know. When we have done similar work in the past, sometimes the stock price and the math can take years to play out.  We are sure quarterly reporting of NFLX will be a nail-biter over the next year.  This will be interesting and we will be following.

For reference here was our model price chart on April 26, 2012.

NFLX with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

What are we saying now?

Same thing!  NFLX should spend sometime at EBV+5.  This will be the true test for this (maybe former) growth stock.  As NFLX reported, they added 979,000 net subscribers in the second quarter, for a total of 30.1 million subscribers worldwide.  NFLX management also announced further international expansion plans, which management acknowledged is expensive and will hurt profitability, especially in the 4th quarter of this year.

Our model price calculation is based on NFLX earning $0.74 cents in 2012, and $2.13 in 2013.  Will be interesting to see how analysts’ revise their numbers in the coming days.  In other words watch our model price calculation in the next week – it should be interesting.

Will the market wait for NFLX?

This is the $64 million dollar question.  In other words, will the stock price of NFLX hang around EBV+5, while NFLX management sacrifices short-term profits for international market share and with increased competition?  My guess is the market will wait for a couple of quarters, at this level – EBV+5.  However, the market has to be happy at the subscription growth rate and NFLX must be winning over its’ rivals – no small task.  As I have said before, quarterly reporting for NFLX will be a nail-biter over the next year.  What if NFLX breaks EBV+5, you ask?  Next major level of support would be EBV+3.  This presents deadly combination for wounded investors, no upside and potential further downside in the coming quarters.

Invest in Research in Motion (RIMM) with less Risk than Prem Watsa!

I saw this news item yesterday that Prem Watsa bought another 25 million shares of RIMM in the last month.  As of July 4, he now owns 51.8 million shares of RIMM, which is about 9.9% of the company.  He owned 26.8 million shares as of March 31, 2012, which was more than doubled from his holdings at the end of 2011.

What would ModelPrice Guy do with this information?

Nothing!  As I commented in my previous post, as RIMM broke down through EBV-3 on May 15, 2012, RIMM must go through a bottoming process.  Any security which trades below EBV-3 has a life of its’ own.  Price volatility picks up with no boundaries to give the security structure.  The wilderness.

It has been reported that Prem started purchasing his position in the 50’s, and his average cost is in the high teens.  You as an individual investor can do better than this.  How?

Wait until RIMM breaks up through EBV-3 or $11.18 as of the May 31, 2012 balance sheet.  If RIMM endures additional operating losses EBV-3 will be lower after one or two quarters from now.  Maybe RIMM won’t make it.  We (and you) have the luxury of time to wait and see what happens.  We can bide our time! The market will always know before the reported fundamentals anyway and as an extra bonus your average cost will be lower than Mr. Watsa’s!

Research in Motion with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

China’s CNOOC Agrees to Buy Canada’s Nexen for $27.50 a share. What does Model Price say?

On July 23, 2012, China’s CNOOC agrees to buy Canada’s Nexen Inc. (NXY) for $27.50 a share.  Even though this deal is expected to take at least 9 months to approve, what does our model price chart have to say about the value of the transaction?

Here is our model price chart,

Nexen Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of NXY – Canada subsequent to this post will be maintained on Facebook, here.

Some of my observations;

1.  Earnings estimates have been coming down for NXY since the end of March.  Tried to stabilize for the month of June, before going lower for the month of July.

2.  CNOOC is paying the model price for the month of June, before the recent downgrade in earnings.  With the amount of time required to negotiate this deal, I’m sure there were anxious moments around the pricing of the deal on the last downgrade in earnings in July.

3.  Even with reduced estimates, model price one year out is $26.83 roughly in line with the announced offering.

4.  CNOOC, I believe, is getting a good deal.  Obviously, this all depends on oil pricing in future years however CNOOC is not over paying for a quality asset.

5.  In general there seems to be a support bid, by the Chinese, for any nonperforming energy company in Canada.  (I’m thinking of Sinopec’s deal with Daylight Energy last October.)  These Chinese takeovers seems to make everyone happy, management, current shareholders, CNOOC and Sinopec (the buyers) and the Canadian Government (Happy to approve deals that make everyone happy!)  Anyone unhappy?

I’m on Market Call!

An early notice however I will be on Market Call on BNN (Canadian Business Show) for the full hour 1:00 pm – 2:00 pm (eastern standard), July 31.2012.

What is going on with the world of finance, and how do you fix it! (Update 1)

Just after I wrote my blog, with the above title, Martin Wolf, of the Financial Times wrote a blog analyzing each major sector in the US economy, in terms of surplus and deficit.  Not surprisingly our analysis is identical, in terms of the US Federal government and its massive deficit.  What Mr. Wolf lacks in his blog is my theoretical construct on the Solvency ratio and Solvency curve, which I reproduce below.  However Mr. Wolf does ask the $64 million dollar question.  Mr. Wolf writes;

The question is, of course, how the government should respond to its sudden shift into massive deficits.  That depends on how the economy best adjusts to balance-sheet adjustments in the private sector.  If the government is to move back into balance, by cutting spending and raising taxes, how would the private sector respond to being forced  [sic] back into balance?  Would it spend more, because of a sudden surge in confidence about fiscal prospects?  Or would it cut back more, so driving the economy into depression, thereby at least partially defeating the effort to improve the fiscal position?

Notice how Mr. Wolf, and probably others in the economic profession, use the term “forced” in terms of individual categories moving “UP” the Solvency curve – the right side of the curve.  As the US Federal government outlines and executes drawing down its deficit, businesses, households, and other categories (as well as banks leading excess reserves) will be spending their surpluses because it will be profitable to do so – in my mind there will be no “forced”.  Demand will be there.  This process will be slow moving at first, however as the US Federal government sticks to its plans to bring its deficits under control the more confidence the private sector will become in spending its surpluses.

How do I know this?  We, as Canadians, experienced this from 1995 to 2002.  Our Federal government outlined and implemented a credible deficit reduction plan and everybody, right hand side of the curve, responded – creating a large amount of wealth for all Canadians.

As both sides move “up” the Solvency curve, as I stated earlier in my previous blog, the new bull market will begin.  I’m really happy to see the proper questions being asked, as Mr. Wolf does, now we just need the policies in place to make it happen.