by Travis Johnson, Stock Gumshoe | November 2, 2018 4:29 pm
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Hi Travis, did you have a chance to check out $TDOC earnings report yet?
Thanks for your thoughts, and have a great weekend!
Hi Travis regarding strategies I struggle to see what the value is in Fairfax financial, quickly looking at the charts you could have bought in 2014 and essentially have been flat until now. Obviously you could have made money along the way if you were nimble enough(you could also have lost big) but from the outside Prem Watsa seems to make more investing mistakes than Buffet at Berkshire. Do you have a upper target price where you sell and wait for the next downward fluctuation to buy back in? or do you simply believe he will get it right long term and hold what may?
I think he will get it right long term, but I won’t wait forever and I do watch their actions pretty closely. The big problem for Fairfax was Watsa’s stubbornly bearish positioning from 2012-2016, which he acknowledges… though the biggest win for Watsa was his aggressive bet against the real estate bubble in 2006-2008, so you take the wins with the losses to some degree.
He is definitely more of a risk taker than Buffett, but he has similarly built and bought some long-term businesses that I think will remain strong. I think Fairfax’s edge over Markel and Berkshire, if you want to think of it that way, is their strong focus on overseas expansion — buying and building insurance operations around the world in growing economies, and investing heavily in emerging markets, particularly in India, which will also add risk. Investors are definitely leery of Watsa, both because of those several years of underperformance and because of high-profile investments like Blackberry that have done poorly, that’s why the stock trades at book value… I expect that will turn, and a market that focuses more on value than on growth might help the turn, but we’ll see.
AAPL: With 5G about to pop onto the stage and no existing cell phones [I have read] having any 5G capability— the smart thing to do would be to not buy a new cell phone now or for a couple of years. Unless money is easy for the buyer. In 2019, 5G will be an ever growing presence. The cell phones released by Spring of 2019 will have some 5G, Apple’s iPhones in September 2019 will be effectively first generation 5G phones. I think it would be smarter now to not buy replacement phones of any kind until at least mid- 2020 or maybe Fall 2021. By Fall 2021, ~third generation. Perhap watch AAPL now and buy shares if you can because there are going to be a whole lot of iPhones sold in the next couple of years due to 5G which should push up the price of AAPL. My opinion. Subject to change at the flick of any eyelash that presents better information or ideas. Personally, AAPL is effectively out of my reach already.
David Sokol was apparently being groomed to take Berkshire “after Warren.” Sokol was uncomfortable with both Warren and Berkshire and wanted out. The only clean exit was to engineer a questionable-looking event that would force Warren’s hand and Sokol did that. The SEC took a close look and called it a “nothing burger” but Sokol had completed his escape. I am super-summarizing an article written a long time ago by or for David Sokol .
Stop Losses: I cannot repeat in adequate detail but some analyst said to calculate the vertical spread of a stock from its baseline. Double that. Add a dollar or a percent or two. A 5% or 10% Stop-Loss is going to be victimized by the market makers. I had that happen to me. Set your stop-loss at 7% or 7.5%; or use 11% to 14%. Calculate so if the spread is, example, $1.20, your Stop Loss will be $2.40 plus the safety margin. Maybe $2.55. Mental stops are best, as Travis says. [From what I recall of all my reading.]
I expect 5G to be a fixed wireless product first, getting into phones gradually — but yes, 5G will probably begin to be a phone selling point in 2019 or 2020. Apple probably won’t have a 5G iphone until 2020, they don’t tend to be first — there are a couple 5G phones out now, just to get bragging rights, but the first implementations of 5G will very likely be home hubs and hotspots, competing more with cable broadband than with mobile phones.
All phones will be probably be primarily 4G/LTE for at least three or four years, with some that can sporadically take advantage of 5G when in specific locations, since 5G is so short-range and sensitive to interference.
Travis, are you including the autonomous cars application in hotspots for 5G? The reason I ask is this application is a pipe dream without 5G, IMO.
I think 5G will be important in enabling truly autonomous cars, but my guess is that we’re jumping the gun a bit — maybe that comes in 5-10 years, but not in the next few years. From what I understand (and it’s not much), this first version of 5G equipment doesn’t handle fast-moving objects or interference/signal blockage from buildings or other cars very well — I imagine that will improve as coverage builds, and maybe cars will even communicate with each other over 5G to create networks, but I don’t think that’s a “first wave” for 5G adoption. 5G will probably mostly be used for fixed wireless in these first tests, and maybe for handling high-demand downloads for early phones that will probably use LTE for most stuff still but will actively shift data transfer to 5G for big downloads or highly demanding connections (video, etc.).
At least, that’s how I’m imagining it in my head. We’ll learn more when we get details about these first few test cities, I imagine.
speaking about when to back, any comment NVDA?
I didn’t sell NVDA when it hit the stop loss, just because I wasn’t permitted to sell — which worked out so far, but we’ll see how it goes.
They’re on roughly an $8/year earnings trajectory right now, with estimates settling down to be about 25% growth over the next two years (not annually, so about 12-14% a year on average)… so the question is how much you want to pay for that, since that’s a huge slowdown from recent growth rates.
I’m willing to pay a premium multiple on the assumption that their new GPUs will not lose market share and that GPU sales will continue to be steady but not necessarily grow dramatically… and because I think, over the long term, that they have a chance to really capitalize on AI by providing the basic technology platform that most young developers are using right now for machine learning systems. The stock is hugely volatile, of course, and was impacted by everything from self-driving car stories to cryptocurrency mining mania, so the price has been all over the place… and AMD is still a meaningful GPU competitor, so they do have competitive price pressures like most chip companies.
So with that, you build an expectation for earnings growth and decide what multiple you’re willing to pay for current earnings. I think 20-25X trailing earnings is a fair baseline to use, given their current estimated growth potential of 10-15% or so (that gives you a PEG ratio of about 2). That would be a comfortable buy point for me, though that’s partly because analysts have been so overly cautious in estimating NVDA’s growth rate for years… and at $7.04 in trailing earnings per share that puts you somewhere between $141 and $176.
I’m still just holding, personally, but the next quarter will be a big one as they talk about holiday season sales of the new high-end GPUs, and what the takeup has been by big customers for data centers.
“buy back NVDA”
#NVDA earnings to be released Nov 15. This is such a volatile stock. It could go up or down by 30 or 40 points. Jim Cramer went out on a limb and predicted a quarter miss.
https://www.thestreet.com/video/jim-cramer-nvidia-is-going-to-miss-the-quarter-14743766
$SBUX Holiday Cup Offer today, however, was a major fail! They were offering a reusable Holiday Cup if you purchased a holiday drink. But, stores across the nation ran out of the reusable holiday cups early this morning. And, they wouldn’t give you a white reusable cup instead. I have been invested in Starbucks for nearly a decade, and stupid stumbles like this are embarrassing.
That is a little silly… but overwhelming demand is good, hopefully they didn’t screw up everywhere.
Re: AAPL, something I’ve not seen much about was their tight-lipped response on the con call about healthcare opportunities. Listen to the analyst question and Cooks response. They have a whole new market they are setting up to disrupt. All the talking heads are focused on the “lack of innovation”. All you have to do is think about the watch capabilities combined with the app store and any number of options they have with their cash war chest to instantly have a significant impact. I added on the dip, and I may be early but the potential is too big given that its not expensive as Travis says above. I wouldn’t bet the farm, but I’d bet the doghouse!
Thank you Travis for another excellent review.
I went to China recently and have been talking to some people there. No doubt Apple products were in much demand a few years ago, but I was told the sentiment has shifted a bit recently. A lot of Chinese are actually buying Huawei instead of Apple or Samsung products. Apple is still a great company, but investors want more growth and cutting edge from Apple. Hopefully 5g will bring Apple more growth.
Do you know anything about Doug Casey’s Gold?
Nice to see your opening position in Prophecy Development Corp. I’ve been a shareholders for years (originally as a silver-play…and it’s been brutal), but I believe it’s massive potential going forward. They’re just getting started, and hiring the new CEO was imho a nice move. Good luck, Travis
Thanks Travis. I love TreasuryDirect and have always felt like it was a little bit of a secret, though I mention to people all the time how it is such a great place to purchase I Bonds on a monthly basis.
RE: iQiyi
Part of my challenge with iQiyi is not being able to evaluate the product from a consumer perspective. Looking at the website is certainly doesn’t have that Netflix polish but maybe that is my Northern American bias. Just curious if any readers with the requisite language skills can answer the simple question: is their VIP content any good?
Travis, What a phenomenal missive! You often speak about wanting to get into positions but are waiting for a better entry point. what i do in those instances, is sell puts at the price i would buy; if i get assigned- i wanted in at that price anyway. If i don’t get assigned- at least i keep the option contract premium. What say you?
Certainly a reasonable plan, particularly for optionable stocks that you want to buy in round lots. Requires discipline and a real mindset of “I want to buy this even if it’s falling”, which is hard for people to stick with in a bear market, but makes sense if you can handle that psychologically. I’ve done that from time to time with stocks that I think have some real long-term appeal, like Starbucks and Qualcomm, though have often doubled down a bit on that, too, by using the put sale premium to buy calls for a much more bullish positioning… probably just because it’s more fun and helps with FOMO-avoidance.