Investing megathread extravaganza

[DaFace]

A place to talk about investing stuff.

[scho63]

Originally Posted by Hog Farmer

Supposedly the next wave of huge runs is supposed to come from Artificial Intelligence. There are going to be gains that will actually make our first Trillionaires according to Mark Cuban. Think about the new computers programmed to LEARN instead of just performing programmed functions. Self driving cars ,robotics etc....

The next 3 years is the window for HUGE gains in this sector.

Facebook just had to shut down an AI test project as the computers started talking to each other in their own language they made on the fly! No one knew how it happened and what it meant. That's some crazy shit right there.

[Demonpenz]

I will be impressed if computers can go a day without bos

[lewdog]

Well so much for me purchasing that Marijuana ETF.

It's only offered on the Toronto Stock exchange and TD Ameritrade does not allow trading a foreign exchange.

It's the first of it's kind and there's no ETF or Index for the US market for marijuana yet.

[Rain Man]

Originally Posted by lewdog

Well so much for me purchasing that Marijuana ETF.

It's only offered on the Toronto Stock exchange and TD Ameritrade does not allow trading a foreign exchange.

It's the first of it's kind and there's no ETF or Index for the US market for marijuana yet.

Y'know, I was wondering how American stock markets can trade shares in companies that participate in illegal activity. If banks can't take their money, it seems like people shouldn't be able to invest in them.

Can you buy shares of an individual marijuana company?

[lewdog]

Originally Posted by Rain Man

Y'know, I was wondering how American stock markets can trade shares in companies that participate in illegal activity. If banks can't take their money, it seems like people shouldn't be able to invest in them.

Can you buy shares of an individual marijuana company?

Most of it's medical marijuana companies so nothing illegal about it. Much of it has to do with Canada and the push to legalize across the board there.

But if it's only traded in Canada, many brokerage firms won't allow you to buy shares if you're trading on the US market.

Only Marijuana related purchased this past year for me was UBQU. Which is a loose term given the current direction which is now getting into cryptocurrency. But the company offers a Hemp line product that looked promising so I took a chance with a little bit of money. Total penny stock so it's more for fun than anything. Headquartered in Denver actually.


http://www.marketwatch.com/investing/stock/ubqu

Outside of that, the marijuana market is still very risky with tons of competitors looking to make a splash, no major standouts. Hence me wanting an index or ETF to be slightly less risky while still investing in that sector.

[Cornstock]

Originally Posted by Cornstock

Tangent question to this, I remember the local banks in areas that had marijuana industries had all kinds of logistical headaches trying to keep "green" money separate from normal money when the industries were blossoming (pun intended) to comply with federal regulations around the source of funds. I haven't followed it closely enough to see if this was ever resolved.

My question is if these restrictions pertain to equity stakes to the companies, especially in jurisdictions where marijuana is still very illegal.

Anyone have any insight to this?

Originally Posted by lewdog

Well so much for me purchasing that Marijuana ETF.

It's only offered on the Toronto Stock exchange and TD Ameritrade does not allow trading a foreign exchange.

It's the first of it's kind and there's no ETF or Index for the US market for marijuana yet.

That answers my question, they must not have the legalities figured out for non legal jurisdictions yet.

[Cornstock]

Originally Posted by lewdog

Outside of that, the marijuana market is still very risky with tons of competitors looking to make a splash, no major standouts. Hence me wanting an index or ETF to be slightly less risky while still investing in that sector.

This is another concern I have about investing in that area outside of an etf. There are so many players, even if the industry eventually has widespread legalization, you could pick the wrong company and lose your investment.

Even an extremely broad etf will participate in the loser's losses. Will the gains by the winners be enough to offset these losses enough to make it a worthwhile investment?

That's rhetorical, as there is no etf that encompasses the industry yet. I did see a fund company that lets you create your own etfs, and if others buy it you earn a commission. But that hearkens back to the other issue, none of these companies are tradeable outside of legal jurisdictions.

[Rain Man]

Originally Posted by lewdog

Most of it's medical marijuana companies so nothing illegal about it. Much of it has to do with Canada and the push to legalize across the board there.

But if it's only traded in Canada, many brokerage firms won't allow you to buy shares if you're trading on the US market.

Only Marijuana related purchased this past year for me was UBQU. Which is a loose term given the current direction which is now getting into cryptocurrency. But the company offers a Hemp line product that looked promising so I took a chance with a little bit of money. Total penny stock so it's more for fun than anything. Headquartered in Denver actually.


http://www.marketwatch.com/investing/stock/ubqu

Outside of that, the marijuana market is still very risky with tons of competitors looking to make a splash, no major standouts. Hence me wanting an index or ETF to be slightly less risky while still investing in that sector.

Good point. I keep forgetting about the medical market.

I wonder, though, if the companies being traded are only medical. A company selling recreational marijuana is still engaged in illegal activity by most states' definition.

And a marijuana company engaged in cryptocurrency? Nothing suspicious about that at all.

[DRU]

Originally Posted by Halfcan

Lloyds banking and other financial stocks down by as much as 25% in 2 days.

That was my point-the money was made on the way down-not trying to time the bottom of the market and hold until it corrects. How long will it take Lloyds to gain that back?

I thought CS and DB had bottomed out, but they just got hammered again. I lost over 5% in my RBC stocks and BMO that killed the slow gains from a month of steady climbing. I will get a nice dividend in a few weeks that will be reinvested at the lower stock price-but it is still crap since they are some of the most solid banks in the world and have a low exposure to Europe compared to most other banks.

Look at Lloyd's growth rates over the last 10 years. Yuck! No wonder.

[DRU]

Originally Posted by Rain Man

Y'know, I was wondering how American stock markets can trade shares in companies that participate in illegal activity. If banks can't take their money, it seems like people shouldn't be able to invest in them.

Can you buy shares of an individual marijuana company?

"During a gold rush, don't mine for the gold. Sell the picks and shovels to the miners."

I'm long on KSHB - Kush Bottles Inc. Curious to hear other opinions on this.

Kush sells packaging products for Marijuana. All these new businesses opening up for both medical and recreational weed have to package it in very specific, approved packaging types. They are taking a two-fold approach with patents on packaging itself, but also the unique ability to add custom branding to such packaging. They are very small cap growth...technically a penny stock trading at $2.10 right now.

They have been able to use their stock to acquire companies that would have potentially competed with them. This shows these companies believe in the growth opportunities of Kush as a whole...opting to become shareholders instead of requiring large cash acquisitions. Of course, this allows Kush to use that cash for more patents, more acquisitions, inventory, and general growth.

This can be seen on their balance sheet where they've doubled their cash on hand nearly 5 times in the past 3 years (8/2013 - 8/2016). Cash from Q1 to Q2 2017 dropped a little bit, but you can see that the cash went into inventory, receivables, and some of it did go towards the acquisitions. Equity went from $9m to $43m on the balance sheet from Q1 to Q2 primarily due to acquisitions. This can be a little bit misleading because much of that equity number goes into the "Goodwill" line on the balance sheet. The point remains, they are building a big moat around themselves by acquiring all these companies.

Their income statements show they've doubled their sales/revenue numbers a little more than 3 times in 3 years, and look to be doubling again this year (if not more). Operating expenses have actually fallen as revenue has grown (based on percentage) and the company is now officially profitable.

They're pretty interesting to me, and it could be something for the more risky portion of your portfolio that could be a home run.

XXII - 22nd Century Group Inc. is another one I was interested in. I put $1k into them about a year ago and after a 64% gain I saw they started to drop so I went ahead and took my profit and got out. Their big thing is that they hold patents in low nicotine tobacco. Well, just last week the FDA announced they're going to start requiring lower nicotine counts in tobacco, and most cigarette stocks took a big hit because of that. XXII has gone up about 50% since then, and are up 168% since I bought them last year...but of course I got out too early...and didn't have much in to begin with. If only...

[DRU]

Let's break-down Facebook. I'm curious to hear thoughts on this from others.

Typically, I would want to see 10+ years of history in order to consider a healthy investment in a company. Facebook hasn't been public that long, so we don't have that data, but here are their growth numbers for the past 5 years.



Of course, those numbers are huge, and they won't be able to sustain such big numbers as they continue to grow. Currently, the "Analyst Consensus" growth rate is 27%. I'm going to be more conservative with this valuation and go with a 23% growth rate.

Current EPS is $4.62. At a growth rate of 23% that means it would take 3.13 years to double once. (The Rule of 72 makes this easy - 72 / 23 = 3.13).

So, what we want to do at this point is figure out what FB would be trading for in 10 years. This will help us put a value on the business today. Well, if they're going to double every 3.13 years, that means they'll double 3.19 times in 10 years (10 / 3.13 = 3.19).

Now that we know that, we can figure our future EPS by doubling the current EPS 3.19 times. 4.62 * 2 = 9.24, and that's one double. 9.24 * 2 = 18.48, and that's two doubles. 18.48 * 2 = 36.96, and that's three doubles. So to make things easy and stay conservative, we can stop there and reasonably assume that FB will have an EPS of $36.96 ten years from now.

So now to figure our future market price per share we need to figure out a future P/E. Again, with limited history behind FB this isn't as predictable as I would typically like, but if you look at the history of most big businesses you'll find that it's very common for the P/E in 10 years to be double the current growth rate. Again, we went with a growth rate of 23%, so we can assume a future P/E of 46. That's sort of up there, so once again, to be conservative I'll back that down to 40.

So now we have a future EPS of 36.96 and a future P/E of 40. This gives us a 10 year future market price of $1,478.40 / share.

Now, let's assume we want to earn 15% / year on this investment, which is an aggressive stance and makes what we're doing here very conservative. If we work backwards from the 1478.40/share price we can find the price we should buy at today if we want to earn 15% per year compounded. To do this we can simply divide 1478.40 by 4. This works because math is cool, and you can study why that works elsewhere if you're interested.

So, 1478.40 / 4 = 369.60. This means that based on our valuation, if we want to earn 15% / year on Facebook for 10 years, we need to buy at $369.60 or lower. This is our "intrinsic value", or what the company is actually worth today....to us...given our goal of 15% / year.

Of course, this would assume that everything goes as planned, and it continues to grow at the rates we expect, etc. How often does that happen? Hardly ever, right? So now we apply the Benjamin Graham / Warren Buffet "Margin of Safety" of 50%. So we simply chop our intrinsic value in half. 369.60 / 2 = $184.80.

So in theory, if we can buy FB at $184.80 / share, we're getting it for half off...a 50% discount on its current value...which already assumes a 15% compounded interest rate. So we've been extremely conservative with our calculations (we backed off the analyst consensus growth rate, we backed off the future P/E, we applied a 15% earnings in our calculations, and a 50% margin of safety.)

Finally, we can look at today's market price...and we see FB is currently trading at $169.62 quite a bit below our extremely conservative calculations.

The only thing going against it is that we don't have 10+ years of history to go by, so the numbers aren't quite as predictable as they would be otherwise. Again, though, that's why we went extra conservative.

So based on all of this, FB seems like a screaming BUY right now. Like, fill up the dump trucks with as much as you can. That said, I'm new to all of this, so I'm interested in hearing thoughts about how I broke this down and general opinions on my conclusion..??

[Nightfyre]

I doubt that Facebook can maintain bottom line growth of 23% for ten years. At some point they hit one of any number of growth obstacles, such as market saturation, regulatory risk, and social media competition or even obsolescence. Furthermore, assuming they will maintain a PE of 40 is not remotely conservative from where I am sitting. The higher PE is indicative that the market is pricing the stock for significant future growth. Anything that impinges on their growth will inevitably decrease the multiplier.

The problem with your valuation methodology is that it depends on projecting long term earnings growth and extrapolating that projection by multiple factors to take a guess at a future value. If your assumption is only a little off, your whole value takes a hit.

You can conduct sensitivity testing on your model by shocking the underlying assumption, which would be better than picking an arbitrary percentage at the end. What happens if bottom line growth is only 12% instead of 23%?

[Nightfyre]

Additionally, why use the rule of 72 when you can just take EPS*(1+net profit growth) ^10

You can create a spreadsheet to do all this in like thirty seconds plus easily allow you to change or have a spectrum of different earnings growth rates.

[DRU]

Originally Posted by Nightfyre

I doubt that Facebook can maintain bottom line growth of 23% for ten years. At some point they hit one of any number of growth obstacles, such as market saturation, regulatory risk, and social media competition or even obsolescence. Furthermore, assuming they will maintain a PE of 40 is not remotely conservative from where I am sitting. The higher PE is indicative that the market is pricing the stock for significant future growth. Anything that impinges on their growth will inevitably decrease the multiplier.

The problem with your valuation methodology is that it depends on projecting long term earnings growth and extrapolating that projection by multiple factors to take a guess at a future value. If your assumption is only a little off, your whole value takes a hit.

You can conduct sensitivity testing on your model by shocking the underlying assumption, which would be better than picking an arbitrary percentage at the end. What happens if bottom line growth is only 12% instead of 23%?

Yeah, that's why I would typically want to see 10 years of consistent growth history, so the projections could be more predictable. In this case you're right...probably too many assumptions involved, even with the margin of safety in place.

Interesting feedback. Thanks.

[DRU]

Originally Posted by Nightfyre

Additionally, why use the rule of 72 when you can just take EPS*(1+net profit growth) ^10

You can create a spreadsheet to do all this in like thirty seconds plus easily allow you to change or have a spectrum of different earnings growth rates.

Just makes it quick to run numbers in your head when reviewing financial statements. I typically look for growth rates of 10% or higher in ROIC, ROE, EPS, Sales, BVPS, and and OCPS combined with minimal debt. I look at 10 year, 7 year, 5 year, 3 year, 1 year. If I see 10% or higher in all of these areas and it's not dropping significantly, then I look to dig deeper with more accurate numbers in Excel or other tools. So again, rule of 72 makes this quick to calculate in your head while scanning statements.

The idea is if ROIC and ROE are 10% or higher consistently for 10/7/5/3/1 year, then management of that company is probably pretty solid and looking out for shareholders.

If EPS, Sales, BVPS, and OCPS are 10% or higher consistently for 10/7/5/3/1, then that's a good sign the company has a strong moat in place.

So the valuation model depends on those things being true, which makes the future valuation more predictable, which of course is what the whole thing is based on.

So again, in this case I think there's just not enough history behind it, and I should not get greedy and stick to the model. Thanks again.