Current Positions and Thoughts

So, I've made some changes since last August and continued to buy since then. I got out of NFLX at $250 before its huge drop, but sold CTXS into the drop in the Fall. CTXS has come back pretty nicely now. I also completely exited GOOG today, and have sold some of my AAPL position after this run-up. I've also added a size able position in BAC calls and common. This is something I've been tweeting since October.

I really like GOOG as a business and feel their stock is undervalued, but the volatility surrounding the stock is a little extreme. As a long-term investor, I'm looking to add more stability going forward. I even exited my AMZN position as well for similar reasons. I'm targeting new positions in DEO, IBM, and maybe MCD going forward. I'm also looking to add more PG and BRK-B. Other than that, not too much has changed.

BAC is a wildcard, and could reverse here after its substantial run from $5, but I think it still has room to run over the next 2 years. WFC has also seen a big move from $23 to $33, but I still feel comfortable with the position.

AAPL 8.5%

WFC  16%

C    8%

BAC  8.5% (a majority of jan 2014 and jan 2013 calls and some common)

MSFT 3.5%

JNJ  7.5%

KO   13%

KFT  7.5%

PG   5%

NKE  6%

BRK-B 6%

SNCR  4%

GE    6.5% 

Could This Be Where Apple Tops?

Could this be where Apple tops? (click picture for larger version)

I've been a holder of Apple stock for over 3 years, and I would love to see this move continue, but this two year chart shows a very interesting channel. Is Apple going to top around $510 at the top of this channel?

With Apple at its highest RSI overbought level in 2 years, I have to think we see a pullback in the stock. I started buying short-term puts and will buy more up to $510. 

This is more of a trade as I'm still holding stock (10% of portfolio) and I still believe in Apple's long-term fundamentals(the stock is still cheap). 

Recent Panic and Fear Are the Only Things Similar to 2008

After today’s 5% drop, the markets appear to be pricing in a repeat of 2008. CNBC’s website is covered with double-dip and even depression predictions. The Dow was recently down 8 days in a row which was the most since 2008, and a 12% drop in two weeks makes this feel like 2008 all over again.

Still, when you sit down and look at our current economy, there’s very little in common with 2008:

• Banks are much better capitalized than 2008, with many profitable and some running record profits ($JPM, $WFC).
• The auto industry is still reporting sales growth with $GM and $F both profitable and nowhere near bankruptcy.
• U.S. companies as a whole have a record $1.9 trillion in cash on their balance sheets and they’re in extremely good position to weather a downturn.
• Valuations are already depressed. At the end of 2007 S&P companies reported 82.54 EPS with the S&P over 1400 or around a 17 p/e. With the S&P at 1200 and yearly earnings estimates still at around 95, this gives the S&P a 12.6 p/e. Even reducing EPS estimates to 85 results in a p/e of 14.11. (Don’t forget record cash on hand as well) Source: http://bit.ly/eEYffl
• Interest rates are at record lows, and the markets are flush with liquidity. The fed has made it clear they will continue to accommodate if needed. Companies are issuing bonds at record low rates. Liquidity is not a problem like it was in 2008.
• While we have seen a spike in gas prices, they are already on the retreat, and in my opinion the US economy is in much better shape to handle them with many upgrading to more fuel efficient vehicles and having adapted from the 2008 shock.
• We were losing jobs as early as December 2007 which accelerated throughout 2008, but we're still seeing job growth as of July 2011.
• The dollar is still extremely weak and helping companies with international exposure produce record S&P 500 profits and higher than normal margins.
• And here’s the biggest and most important differentiation: We know the economy has problems and needs to be fixed. The market spent a good part of 2008 in denial about the problems facing the economy, but now the media and even our own government seem to spend as much time possible reminding us about how bad things are. Investors are depressed, valuations are depressed, and everyone is scared to invest. So who is actually left to sell? In a worst case scenario we’re likely to run out of sellers much sooner than we did in 2008.

With all this being said I still have no idea where the market will eventually go. With the Japanese crisis and current debt problems in the U.S. and Europe, the market could stay negative for an extended period of time. However, I think if you cut through the extreme pessimism, there are many quality companies out there selling at severely depressed prices.  

Stocks I own like Coke, Johnson and Johnson, and Kraft all reported solid earnings and are trading near or way below their normal valuations. Google and Apple both recently reported record earnings and they still trade around 10 forward p/e’s if you back out both of their massive cash piles. All of these companies also receive a large amount of revenue from international and emerging markets, and are not as reliable on a weaker US economy.

Things could be a lot better than they are right now, and there’s plenty that needs to be done to get the economy back on track. Still, I think the market is pricing in an extremely negative outcome that’s just not as likely to happen. However, I still try to prepare for any scenario and my strategy has always been to buy quality companies that I’m comfortable holding in a downturn. I will continue to be a buyer here at what I feel are overly depressed levels.

Current Positions

My portfolio at the close today:

AAPL	11.00%
WFC	12.50%
KO	13.00%
KFT	8.00%
JNJ	8.00%
GE	6.00%
C	6.50%
MSFT	4.00%
NKE	5.00%
GOOG	6.50%
AMZN	5.00%
SNCR	3.50%
CTXS	3.00%
BRK-B	5.50%
NFLX	2.50%

My Long-Term Strategy

I’m a long-term trader partially by choice but also because I’m an average guy who doesn’t have time to follow the market every second of the day. I have a job outside of investing which makes day trading impossible. I came to this realization pretty early on a few years ago, and I ended up adjusting my strategy. I make about 5-7 trades a month, and they are generally on the buy side. I also remember during the economic slowdown how often long-term investing was labeled dead and in the new market you have to be consistently nimble in stocks. My post disputes this and I totally disagree with this assumption.

As the economic downturn got worse into late 2008, I became more and more interested in Warren Buffett. He is easily one of the most recognizable long-term investors in the market. A lot of what he does is considered boring and out of date, but if you look at my post on long-term trading, you’ll see the returns were actually very good for the past ten years.

So how do I invest? A major chunk of my portfolio is in stocks that have large moats, strong cash flow, and solid brands. A company like Nike which is a very common name returned huge gains over the past ten years and also paid a small dividend. Stocks like Coke, Johnson & Johnson, and Kraft all held up during the past 10 years and paid a large chunk of money in dividends. I’m not looking to make 30% overnight and not willing to take on that risk. Instead, these companies have become a core portion of my portfolio and will continue to be in the future.

My Top Three Holdings (35+% of My Portfolio)

Coca-Cola
Wells Fargo
Apple

Why are these three stocks my largest holdings? Coca-Cola has one of the strongest brands in the world and has consistently produced growth and increased their dividend. Wells Fargo survived the economic crisis and in my opinion has come out stronger than ever. They almost doubled their entire deposits by acquiring Wachovia, they have been trading near or slightly above book value for a while, and they showed a lot of discipline in the home mortgage market which actually put them in the offensive position to buy Wachovia.

Apple is somewhat of a different stock and requires a little more discipline. Even after the run-up in the stock I think it’s undervalued. Apple is generating insane amounts of cash flow, innovating consistently every year with new products, and has one of the strongest brands in the world. However, Apple is a technology stock, and things change rapidly in this type of market. Even though it is a large position for me now, I am being as nimble as possible with their stock. This is one holding I expect to change in size over the coming years. I have a big portion of my portfolio wrapped up in these three stocks because I have a lot of confidence in their businesses in good times and bad.

It’s very important I think to understand that long-term investing is not something where you pick 10-20 stocks and buy and hold. The market is doing well lately, and that strategy may have worked, but there is a big question to ask. If the market fell 5% tomorrow would you continue to hold those stocks? Do they have a strong enough moat to defend themselves and recover? What happens if you continue to hold and the market drops 15-20%? Are you still holding those same stocks? These are questions I asked myself before going into these investments.

I think a lot of losses are generated by people who panic and sell, especially in stocks that are volatile and lacking a strong moat. There are plenty of examples in the tech industry in early 2000 where companies surged and then ultimately failed a few years later wiping out billions in shareholder value. I was one of them (on a much, much smaller scale) and I don’t intend to repeat that.

The next 35%

The next 35% of my portfolio is locked up in similar stocks with strong moats, solid dividends, and growth. They are: General Electric, Kraft, Johnson &Johnson, Berkshire Hathaway, AT&T and Nike. If you look at a ten year chart of these stocks, most of these stocks are doing better than the S&P 500 over the past 10 years and even better if you include dividends. These are companies I’m comfortable holding the next day if the market drops 5%, and if the market continues to drop.

The Last 30%

The last 30% of my portfolio takes on a little more risk and uses my technology background. They are: Google, Amazon, Nvidia, Citrix, and Synchronoss to name a few. After a 5% drop in the stock market, these are the stocks I look to first to see if I need to make any changes. Some of these have performed very well over the past year, and I’ve reduced positions in these over time. I do pay attention to the price I am paying for these stocks. I recently reduced my holdings in Nvidia by about 45% because the stock has run up very fast in a short period of time, and I feel the stock is overvalued. These are not buy and hold stocks and I don’t treat them in my portfolio as such.

My Expectations and Goals

I’m never going to come out and predict where the market will be in the short-term. I think that’s a foolish game and making large bets on something that is almost impossible can put you at a lot of risk. However over the long-term I think it’s safer to say we will be higher. I have built a fairly conservative portfolio, but with a majority of stocks I believe will be higher ten years from now. My ultimate goal is to have stability while producing consistent returns from quality companies with an emphasis on value.

Disclaimer: I am not in any way recommending an exact duplication of this portfolio as your investing strategy depends on your personal financial situation.

Why Apple Belongs at $400 Instead of $300

With Apple being up over 200% the past 2 years, it's easy to say that this stock's run is over, but I don't think that's the case. Apple's most recent earnings report showed an acceleration in growth, and the stock is not currently reflecting that. My $400 price has some assumptions, but I still believe they are likely conservative.

First, I think Apple could easily earn 5.75 EPS in their Q1 report as Apple reported 4.64 in Q4. That's a 24% sequential increase in earnings during their strongest quarter fueled by the Holiday season. Apple has seen a larger sequential increases than this, and did not have the product lineup they have now. You may argue that Apple only guided for 4.80 EPS in Q1, but Apple is known to sandbag, and their Q4 estimate of earning 3.44 EPS estimate was clear evidence of this. Apple earned 34% more in Q4 than they guided the markets. Apply that to their Q1 guidance and you get 6.43 EPS. I think 5.75 EPS is clearly conservative even with potentially lower margins.

If we assume Apple does greater than 5.75 EPS in Q1, then the rest becomes basic math. For Q2 it's safe to assume a 15% drop in EPS vs Q1, which is likely overly pessimistic. For Q3 and Q4 I would expect at least 7.5% and 12.5% sequential growth respectively. This assumes an iPad refresh, small tweaks to the iPhone, and a pickup in growth in Q4 due to school shopping. This doesn't even include the positive impact of Verizon picking up the iPhone or any new product launches Apple has up its sleeve. This leaves us with:

Q1 2011 - 5.75
Q2 2011 - 4.89
Q3 2011 - 5.25
Q4 2011 - 5.90
FY 2011 - 21.79 vs FY 2010 15.15           =          44% yoy EPS Growth

Once analysts realize Apple will do greater than 20 EPS for 2011, $400 is not unrealistic at all and I believe Apple could hit this as early as late January 2011. That would leave Apple under a 20 forward p/e with 33-50% EPS growth. This doesn't even include the mountain of cash Apple has which is already around $56 a share or 51 billion.

There are risks to these assumptions such has margin compression, slowdown in the economy, slowdown in the PC market, etc. But I don't think these issues will manifest in the short term. I would be buying the stock here and I personally added a small position of calls to my long position.

Some Advice for New or Young Stock Pickers

After watching Citrix Systems and VMware drop 14% and 9% respectively, I thought would give some advice for newer or young stock pickers. Investing in individual stocks is a lot different than throwing money into your 401k, mutual fund or ETF. Many mutual funds and ETFs come with some sort of prepackaged diversification, shielding you from the volatile movements of specific stocks.

When I first started investing in individual stocks, I went towards what I knew and this was technology. I was almost 100% technology at the time and the movements were extremely volatile. Over time I have adjusted my portfolio to where I am much more balanced with Coke (KO), Kraft (KFT), and Johnson & Johnson (JNJ) being some of my largest holdings. Not only are the returns still good, but its helped cushion the blow of some of the more volatile days in the market.

I know a lot of young investors are given advice to take on risk because they're young. They can make up losses over time. But a loss is a loss, and as people drift into high fliers or momentum stocks, losses can pour in a lot quicker. Would you have sold VMware today when it dropped 9%? What happens if VMware continues to drop? These are very important questions that need to be asked BEFORE starting your position.

STEC was one of those stocks a lot of people chased in 2009 that had a lot of good momentum going. STEC sells solid state disks to companies like EMC. These hard drives are much faster than typical drives seen in a personal computer, and STEC saw a large spike in orders in 2009. It was a highly visible stock, and not too hard to understand their product.

In late 2009, the company reported a slowdown in orders. The stock fell and it didn't stop. Chasing that stock burned a lot of investors, and a lot didn't get out early enough. STEC was a highly speculative stock and had been priced on extremely high growth rates. Once investors realized those growth rates had stalled, and even reversed, the stock saw a major correction. You may feel the stock has nowhere to go but up. But a stock that goes up fast will fall just as fast if the company doesn't deliver.

I would recommend new or young stock pickers to start slow and be patient. You may be able to lose money, but those losses can add up over time. Even the smallest of losses will make it that much harder to get back to even. Take a look at my article on long-term investing, and you'll see that you don't even need momentum stocks to beat the market.

This is not a knock on Citrix or VMware as they have had incredible returns for the year, and are very well run companies with strong fundamentals behind them. Just make sure you don't have all your eggs in one basket, and be prepared to adapt quickly if those fundamentals change. The movements in Citrix and VMware today are examples of how quickly things can change for stocks that have had a great run.