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Fact for the Day: Stock Buybacks

Often when you read the paper or are on Yahoo Finance, there’s always a company announcing a “buyback” leading to happy investors. What exactly is a buyback?

A buyback is essentially the company buying back shares and “retiring” them which decreases the amount of shares available on the markets.

There are generally 2 purposes of this:

1) To distribute earnings among less shares which in turn increases the value of each share

2) Remove shares from the market that can be bought by someone/something seeking leverage in the company (something management hates)

3) Companies also may initiate a buyback to offset the effect of paying employees in stocks and options.

This doesn’t apply very much to college students but is definitely something you should know if you plan on investing long term.

The major banks have been trying to buyback shares forever since the financial crisis but the government has forced them to hold off until recently. The reason for this is that the government didn’t believe banks were holding enough cash to start spending it on buybacks.

For example, this past spring Citigroup (C) was finally cleared by the Federal Reserve to initiate a stock buyback after passing a “stress test” which simulates a recession and checks if a bank can sustain itself without collapsing.

In addition, companies like to buyback their stock when the price is below the book value essentially giving themselves a bargain. Companies can retire the stocks at a lower price and issue them once the stock price goes back up.

Share buybacks also tend to be one of the demands of our divas when they buy a stake in a company. Carl Icahn has been trying to push Apple (APPL) to buyback their shares for months now and we will see whether Apple bends.

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Posted by on November 24, 2013 in Uncategorized

 

Back to my story…

So I’ve side tracked a little maybe (okay, maybe a lot) from my experiences and my story as an investor so let’s continue.

You’ve heard about the first half of the Vivus (VVUS) story and heard about Zipcar (ZIP) as well. Keep in mind all of this and what I am about to talk about occurred in Spring 2012.

So my next stock pick was probably as close as I got to day trading (i bought and sold within a couple days of each other).

As I was researching about VVUS, I learnt about their direct competitor who had yet to receive approval from the FDA Advisory Board who recommends drugs for approval. I got into VVUS after the recommendation and after it had DOUBLED. The competitor who’s advisory panel was coming up is called Arena Pharmaceuticals, Inc. (ARNA). 

There obesity drug was considered far less risky but not nearly as effective making it logical that the drug would be recommended for approval. But that and the all the positive articles were not enough for me to buy it. Why? Because if a stock can double if it’s recommended it can half if it isn’t recommended which is as risky as it possibly gets. You either walk out doubling your money or losing half of it.

I actually emailed various obesity specialists and people at the FDA about their opinions and the consensus was that it was a low risk drug with enough efficacy to at least get recommended if not approved. And they were right, it got recommended. I was following the live blog of the panel’s questions to ARNA throughout the day and it finally got recommended after hours. This is the screenshot I took (yes I always take a screenshot, its a nice memory to have). There was actually a run up in the price after I bought up to the date of the panel hence the higher price here:

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I remember buying ARNA right before final exams got started and selling right in the middle of them before my Organic chemistry exam. I literally had no motivation after I sold (which reflected on my exam lol) and here is why:

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A 138% gain…my largest gain to that point (yes there is an even larger one). I had just made more money than I had in my bank account (imagine all that Taco Bell….)

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You may ask why I sold at $6.50 instead of $6.95. That’s because the moment the market opened the next day there were initial violent fluctuations so I just took the money and ran. Why didn’t i stay in? Because I was a shareholder in VVUS and I believed they would crush ARNA once both drugs got onto the market.

The jury is still out on that one….

 
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Posted by on November 21, 2013 in Uncategorized

 

My take on the the Twitter IPO

I’m sure at least a few of you noticed that Twitter (TWTR) went public recently and had quite the run up in price. Unfortunately most of us everyday investors didn’t have a chance to reap in any gains because the price jump occurred pre-market. Notice the “Open” price.

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It sucks but the only way to get in pre-market is if you are already a shareholder or if you got $100-200k sitting around which is usually the minimum buy-in to get in pre-market.

I think by this point you guys know how I feel about tech/website companies that (a) Are not profitable (b) Have no revenue.

Twitter is technically worth around $24 billion right now with around half a billion in revenue and not profitable. I like Twitter but like I’ve said many times before, these business models aren’t sustainable to reflect the stock price unless something drastic happens.

At least they have a sense of humor (*cough* Zuckerberg). Who better to tweet their IPO than Twitter?

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Posted by on November 19, 2013 in Uncategorized

 

Activist Investors: A CEO’s biggest pain in the ass

If you are reading Yahoo Finance and WSJ enough, sooner or later you are going to see “blank activist investor acquires stake in x company”. What does that mean?

It means some diva hedge fund manager who controls billions of dollars is attempting to force the management of whichever company he/she buys up shares in to use strategies solely focused on raising the share price.

Now as an investor your first assumption is that this is a good thing for you. Maybe in the short run but not in the long run. There is a fine line between short term shareholder value and long term shareholder value and that is the difference between these activists and management.

A CEO doesn’t give two sh**%%$ts what happens in day to day fluctuations. He/she cares about the long term sustainability and profitability of the company. No one knows a company better than management and shareholders should let them to their job. The problem is that any idiot with billions of dollars at his disposal can buy up a significant amount of shares in a company essentially giving them influence on the Board of Directors.

These divas not only try to get on the board but appoint directors that will support their cause. It’s a dirty and ugly battle unless management and the board are on the same page and can muscle out the activist investor (always great to see).

Lets introduce you to some of the queen divas:

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Queen Diva #1: Carl Icahn

Queen Diva # 2: Williams Ackman

Queen Diva # 2: Williams Ackman

Queen Diva#3: Danie Loeb

Queen Diva#3: Daniel Loeb

Some of these guys have even taken opposite sides in a company aka Herbalife Ltd. (HLF) where Icahn and Ackman took different sides one betting against the company shares and betting for the companies shares. Shareholder battles like these can destroy companies distracting everyone from the company’s main function: to sell goods and services.

I was in Netflix when their shares were hovering in the $50’s and Queen Diva #1 built a sizable stake and demanded the company be put for sale. This is one of the reasons activist investors leaves a bad taste in my mouth. It’s a ridiculous that if you have a ton of money at your disposal you can leverage your way into a company and make demands. Yes, some companies need that nudge but someone needs to put these divas in their place.

Netflix used a “poisin pill” on Icahn which allows existing shareholders (except the acquirer) to buy more shares at a discount. By purchasing more shares cheaply (known as a flip-in), investors can get instant profits and more importantly, they dilute the shares held by the acquirer. This makes the takeover attempt more difficult and more expensive.

And now Netflix is at $300 and though Icahn made a ton of money off his stake, it’s nice to see these guys get put in their place. Mad props to Netflix CEO Reed Hastings.

 
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Posted by on November 16, 2013 in Uncategorized

 

Snapchat rejects $3 billion bid from Facebook. Madness?…I think so

Screen Shot 2013-11-14 at 9.43.08 AM

Sorry again for the massive delays in post. I am ACTUALLY going to try not knockout a couple posts today so hopefully that happens.

This article isn’t exactly stock related but most definitely is relevant. So Facebook offered to buy Snapchat $3 billion in cash….and their 23 year old CEO said no. Are you kidding me?

A company that has ZERO revenue but somehow has a $3 billion valuation and this guy rejects it. Instagram was bought for $1 billion pre-revenue but it at least seems like you could put ads on Instagram.

How could you possibly put advertisements on Snapchat? The only thing I can think of is advertisers sending 5-10 second mini-ads to users but you can only plague users with so many ads until they get irritated. Even then, there is only so much advertising money to go around.

One logical reason Facebook is making the bid is simply to increase their user base or to somehow integrate Snapchat into Facebook. Sometimes companies are acquired (1) just to prevent them from getting too large to become a threat (2) to prevent/spurn a competitor from acquiring them.

A lot of these tech companies are still valued at the # of users rather than potential/current revenue streams and apparently nothing has changed. This is great for us as entrepreneurs who can come up with apps/websites and focus on user growth and still get ridiculous valuations but sooner or later larger companies will realize that these startups don’t deserve these valuations which in turn will reduce venture capitalist enthusiasm for these companies.

MEANWHILE, if you have an idea for an app or website you should defiitely go for it. Grow it, scale it, get a nice valuation and sell it before the world realizes that it’s worth a lot less than they realized.

 
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Posted by on November 14, 2013 in Uncategorized

 

Twitter IPO

Everyone should take a look at the Twitter IPO and what exactly is going on. Nothing more helpful than seeing an IPO in action and how exactly it works.

Here’s the Yahoo Finance link:

http://finance.yahoo.com/q?s=TWTR

 
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Posted by on November 7, 2013 in Uncategorized

 

Protect Yourself from the Euphoria

What’s the #1 rule in investing?

BUY LOW, SELL HIGH

As simple as that may seem, a majority of investors rarely follow this very fundamental rule. You may ask why and I’ll give you two words: INVESTOR EUPHORIA

Essentially this is the fear of missing out on large returns and putting your money in the market after significant gains have already been made. Yes, you will feel like sh*$%t when you miss out on money but it’s worth stomaching this vs. losing money once the market cools off.

As I’ve said many times before, timing is key but when you miss out on the right time you should either:

1) Wait it out and find a good buy point for whichever companies your are targeting

2) Use a different strategy to identify opportunities (betting on turnarounds, buyouts etc.)

Right now I’m in the position of stomaching the missing out of potential gains. 4 stocks on my watchlist have all blown up and i didn’t buy them due to a combination of incorrectly anticipating a market downturn and just not having the time to do enough due diligence before I buy these companies.

These companies include Corning (GLW), Yahoo (YHOO), Boeing (BA) and Microsoft (MSFT). Each time this happened, I had the same reaction as Buzz:

Yes it burns on the inside but I have to keep telling myself that it is what it is and that all these stocks are too expensive for my liking right now. Many people ask themselves “But what if it goes up even more?” and this is what traps investors into buying at expensive prices.

The best investors are the patient ones (very difficult to do). The important thing to keep in mind is that there will always be market downturns and always a better price to buy a stock at. This is a little more difficult to follow if you are a college student and are using your gains as income (*cough* me) but if your investing in the long term it’s worth it.

Even if you are a college student (this is a guide for college students lol), you would rather maintain what money you have than risk losing it. Most of us only have a couple hundred bucks (think about all those burritos) so please don’t jump in just because everyone else does.

 
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Posted by on November 5, 2013 in Uncategorized