Stealth Growth Insider Performance and Summaries

I publish an investment newsletter through StreetInsider and the performance has been better than I anticipated.  With earnings hitting, I thought it might be worthwhile to make the summary available.  I think the performance numbers are pretty impressive with 88 ideas in 3 months that have an average return of 7.8%.  Not annualized, 7.8% in 3 months.  9 of the ideas highlighted have a return of over 20%.  SGI072516

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Why Hedgies Got the Brexit Vote Wrong

In the days leading up to the U.K.’s European Union referendum, all signs were pointing to a landslide “remain” vote but when 52% of the votes materialized for the “leave” camp people “in the know” were left scratching their heads. How could so many people have been incorrect? The answer is very simple and the data was available to have figured out the mistake before the vote concluded. It all boils down to weighting the political bets.

Betting on election results is nothing new. In presidential races beginning in 1896, the New York Times provided daily betting quotes using bookies as sources through agents at every stump and whistle-stop to seek out information and gauge popular sentiment.

An excellent analyst, Nick Colas from Convergex, recently included the following in a note: “It is simple (too simple, we believe) to say that the only market battle this week is the Brexit vote. That conflict seems largely decided. As we’ve noted in prior notes, the gambling odds available from offshore bookmakers have never forecast a “Leave” vote as the likely outcome. Current odds of a Brexit are 25% and “Stay” is at 78%. Yes, a few polls went the other way last week, but more recent surveys show “Remain” in the lead.”

In the weeks leading up to the vote, up to and including Thursday morning GMT, the odds makers claimed there was only a 76% probability of remaining in the EU. However, this was skewed by the size of the bets. The odds makers were looking to offset risk not take a side on the final voting result. People who were voting on “Stay” wagered more per bet and the votes were weighted by the bet amount. The greater amount of capital being wagered skewed the probability towards the “Stay” camp. As of Thursday afternoon NY time, the bookmakers showed a 17% probability of leaving despite the number of bets being placed that day were 2:1 for leaving.

This tidbit of information came from by watching the twitter feed of British Political Betting Site, “Ladbrokes Politics”. Most of the day the site contained updates like this but towards the end of the day, this tweet confirmed the number of bets was leaning towards “Exit”. Anybody watching the twitter feed would have seen this piece of information.

Investors and multinationals saw only the economic advantages of remaining in the EU. From that perspective, a “remain” vote made perfect sense. So when relying on dollar weighted bookie statistics rather equally weighted exit polls, investors seemed to see what they wanted to see. In the minds of the voters however, the political and social impact of remaining in the EU outweighed the economic consequences of leaving.

I’m a bottoms up investment analyst who looks for hard data points that show an inflection in profit growth and the Brexit vote does not change my stock selection methodology. It did however, give me better entry points to add to my US focused investments including Lumber Liquidators ($LL), Nordstrom ($JWN) and Brightcove ($BCOV).

Time to Buy Biotech via iShares Nasdaq Biotechnology (IBB)

The IBB has been pressured dramatically over the last year as growth becomes less dependent on price increases.  Later in the day, I will be publishing a full note but for the benefit of the followers of this blog, I wanted to publish a quick note highlighting the investment opportunity with an update to come later today or early tomorrow addressing the individual aspects of the investment.

The $IBB offers a diversified way to gain access to some of the top companies in the sector with no more than a 10% concentration in any one company.  There are 8 key holdings that make up >50% of the index that many investors would agree, have stable profit flows from an established portfolio of therapies.  (see below)

Why now?  I have been working on a buy thesis note but due to personal time constraints, have not refined it enough for publication.  I had expected to wait until the new quarter to begin acquiring shares but I intend to buy for my personal portfolio today and wanted to go on record before making the purchase.

How to buy.  Because Biotech is so volatile, I recommend taking only a 5% position overall so I am splitting this between shares and options.  I intend to buy 2.5% IBB shares and sell the cash equivalent of $255 puts expiring April 9th for ~$4.00.  If the shares are put to me, the cost would be an average of $254.50.

Celgene    CELG     9.7
Biogen        BIIB     9.52
Amgen    AMGN    9.29
Gilead         GILD   8.67
RegeneronREGN  7.09
Mylan NV   MYL    4.16
Alexion     ALXN    4.15

Apple Is on Track to Report Upside to iPhone Sales if Foxconn is a Good Indicator

cash_iphone_appsOn Thursday 12/10, Foxconn reported record high sales for November; $15.8 billion. This headline caught my eye since Foxconn is the largest assembler of Apple iPhones and iPads. November monthly sales hit a record high and market analysts attributed the better than expected results to orders from Apple since it accounts for more than 40% of Foxconn’s total sales.  Local press coverage of the announcement can be found here.

To see the rest of the article, please refer to the AmigoBulls website here.

 

Is HomeAway a Financial Haven? Earnings +/+

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Perfect Island HomeHomeAway announced quarterly results that exceeded revenue and met profit estimates.  Revenue of $114.3M beat the $110.4M estimate and EPS of $0.15 met Wall St estimate.  Revenue guidance of $114.5-116.5 mln was better than the projected $113.6 as well.  After hours, the stock traded up 11% to $36.20 on the better than expected results and guidance (+/+).

Growth Rates

Growth boosted by performance listings in Europe.  Listings growth of 34% was boosted by the addition of performance listings in Europe which is an incremental opportunity for the company.  This higher margin category boosted revenue  per listing as well as listings growth.  On the call, Brian Sharples, CEO, mentioned that July is seeing this accelerating trend continue.

July14 metrics

 

So what’s the stock worth?

Well, that depends on your outlook for the future, Take what you think is the right growth rate and multiple then look up a value on the table below.  But before you do that, if you like this blog, help us get the word out by following us on Twitter.

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Price Target

All Aboard the Facebook Train, Next Stop $100

Train to $100Facebook blew out profit estimates yesterday on in line revenue.  However if you look beyond the headlines and dive into the numbers, It’s really a simple story that will bring Facebook shares to $100: 1) companies are spending more on social media and mobile advertising, 2) the rest of the world is going to catch up to North America in the amount of spend per user, 3) cost control is letting the revenue flow through to profits and 4) this trend is going to accelerate as we head into back to school and the Christmas marketing season.  People don’t need a 60 page initiation of coverage report to figure this out, you need a 60 line financial model.  Take a minute and just look at the piece of the financial model that we think are important.  All the data came from the company’s financial report.

Advertising Spend per Monthly User

 

 

 

The amount of money advertisers are spending per average user is increasing but North America still leads the rest of the world.  This doesn’t need to be equal but its likely that Europe and Asia will close the gap, at least somewhat.

Margin expansion has been happening and will likely continue.    Margins are improving

 

 

This has been a steady expansion as both cost of goods and operating expenses have been slowly decreasing as a % of revenue.  Nothing exciting here but the profits.

Monthly active users in Asia and the rest of the world blow away North America and Europe and are continuing to grow.

Monthly Active Users

 

 

 

 

If you just took the current quarter’s EPS and ran it out for the next year, the company would receive $1.66 in earnings.  If you factor even 20% growth, you have $2 in earnings.  Facebook grew operating profit at 147% this quarter but if you only apply a multiple of 50 to the $2 in earnings, it is easy to see how the company is worth $100 per share.

NFLX Profits are Up and Rising but Options are a Safer Play

Reed Hastings, CEO

Reed Hastings, CEO

Netflix has seen a tremendous increase in the monthly profit per customer since 1Q13 and this is likely to continue for some time.  The only problems are the valuation and the fact that the stock is already up 40% since the announcement of the price increase.

Lets start taking this apart by looking at monthly profit per subscriber taken from the quarterly earnings report:

Netflix Customer Monthly Data

(Click to enlarge) Netflix Customer Monthly Data

Profit per customer is up substantially: If you look at customer profit, you can see a dramatic increase to $0.44 per month in June from $0.02 per month in March 2013.  This is probably due to a combination of the international expansion and lower cost of DVD servicing as the number of DVD subscribers declines.  If you look at the Y/Y growth for customers and profit, you can see the dramatic decline in DVD subs at the same time that profit growth is rocketing.

Netflix Year over Year growth

Netflix Year over Year growth

As Netflix rolls deeper into Europe and the financial benefits increasing prices contribute to top line growth through out the next year and a half, numbers should continue to improve.

Valuation is scary: The two problems are the valuation and the 40% increase in share price since the announcement.  The stock trading at 150x trailing earnings so a good chunk of the price increase is probably already priced in.

Share price since announcement

Share price since announcement

Stock up 40% since announcement: The chart above is the price since the May 9th announcement of raising prices.  If you want to participate in Netflix today, rather than buying the stock outright, I would consider selling a deep out of the money puts or a put spread.

How the NFLX Put Sale works: By selling puts I would be acting like an insurance company but for investors.  The strike price of the contract I sell would be the price I would have to pay for the shares if the stock is put to me.  You don’t make nearly as much money as buying a high flying stock outright but you can reduce the risk you are taking on.  Lets look at an example.  If I sold a January 2015 put with a strike price of 410, I would not have the stock put to me unless it falls more than 10% from yesterday’s closing price ($455 – 45 = 410).  If the stock remains above $410, I would sit back and wait for the contract to expire and keep the price I received for selling the contract. In this case, the price for a $410 Jan 15 put is $28.  Selling puts is not for everybody, it locks in your upside and it may seem complicated at first but it is less risky than buying the stock outright.

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