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Apple Inc (NASDAQ:AAPL) Investment Analysis

Read this Apple Inc. (NASDAQ:AAPL) Investment Analysis to see if AAPL is worthy of further investment research. Now let’s get down to business…

AAPL Investment Analysis: Overview and Introduction

aapl stock fundamental analysis

Read this article to learn if investing in Apple make sense.

AAPL is a premium supplier of consumer technology products. The company is well-known for it’s mobile, desktop, laptop and tablet devices, as well as the software products and offerings supported by these devices.

And as you probably know…

Apple generates a ton of cash by selling these devices and services on its website, app store and through retail stores. AAPL has a global foot print, but is headquartered in Cupertino California.

None of this should come as a surprise to you. So let’s start digging into what the market thinks of AAPL as an investment opportunity.

Have Investors Lost Faith in Apple?

AAPL shares used to be all the craze of stock market investors. In fact…

During late 2012 investors were so smitten with AAPL that shares climbed up to around $700 in price! But money managers are a fickle crowd. And after the enormous run-up, AAPL quickly fell over 40% in value. Without Steve Jobs, and facing increasing competition in the smartphone category, investors seem to have lost faith in the shares of Apple.

Just see for yourself:

Apple Price History Analysis

Apple’s share price has seen better days. Since peaking in 2012 AAPL stock has languished.

But is this market perception of AAPL share price overly-pessimistic? 

In this investment analysis of AAPL, we’ll look at why investors might be over-reacting to the shortcomings of AAPL. And what questions you should research to find out if AAPL presents the right investment opportunity for you. As you can see above…

Since the decline, shares of AAPL have bottomed out around $400, and slowly climbed back, before settling in to a trading range just above $500. So let’s look at what the market has priced in at this current price, okay?

Apple Fundamental Valuation Analysis:

Apple maintains a market cap of about $465B at time of writing (corresponding to a per share price of about $520). The company is in a strong capital position and does not have any liquidity issues or large amounts of short term debt. At this price, AAPL is showing a PE ratio of less than 13 and a free cash flow yield of just under 10%. And really…

That’s not bad for a best-in-class technology hardware company, right?

When we dig a bit deeper into an intrinsic value calculation, it becomes clear that the market isn’t expecting much of Apple. The good news is…

With such a low cost of capital and sustainable free cash flow, even if Apple earnings languish lower by a couple percent points in the coming years it is still worth about $550 per share based on the discounted present value of future cash flows. (And this speaks nothing of the 2.35% dividend.)

On the other hand…

If you look at AAPL’s key statistics from Morningstar, Apple has an impressive track record of growing revenue, EPS and free cash flow over the last 10 years. Check it out:

Apple Cash Flow and Revenue History Analysis

At the current price, the market is discounting Apple’s track record of growth. (All numbers in Mil USD)

To be fair:

Figuring out the intrinsic value of a company isn’t always easy – and the assumptions aren’t always straightforward. But by looking at the conservative growth case we can find opportunities that give us a low-risk option on profiting from future growth. In this case…

The market is currently discounting Apple’s track record of growth… and… that’s a bet I might be interested in taking the other side of.

Plus:

The case for investing in Apple becomes even more attractive when you start to look for catalysts to unlock shareholder value.

For example…

The Icahn Indicator – Do Activist Investors Present Value Catalyst for AAPL Shareholders?

carl icahn apple activist investor analysis

Do you want to partner with AAPL activist investor Carl Icahn?

Apple is a potential under-valued mega cap stock. This anomaly has attracted some of the most exciting activist investors to the scene. And these big players might just present a catalyst for Apple to unlock shareholder value.

Most notably…

Famed investor Carl Icahn has been showing an incredibly active interest in Apple, as of late. Icahn has a track record of building shareholder value, so having him as your partner isn’t a terrible thing. Icahn was originally demanding ever-increasing share buybacks from Apple (to put their large cash pile to use). But after tabling these demands and still holding $4B worth AAPL, investors might speculate Icahn is in it for the long haul.

But Icahn isn’t the only activist investor to voice support. Previously David Einhorn’s hedge fund Greenlight Capital called on Apple to institute a dividend and better manage capital for shareholders. Greenlight has remained an advocate of Apple into mid 2013, citing the dividend and share buyback programs as investor-friendly activities.

A more tacit endorsement comes from Joel Greenblatt’s Magic Formula Stock Screen, where AAPL is currently showing up as a “buy.”

But besides relying on others, what other catalysts are there for Apple?

New AAPL Product Launch Could Excite Investors:

google glass vs iwatch analysis

Will AAPL announce a new product to compete with technologies like Google Glass?

In the last couple of years, Apple CEO Tim Cook has taken the baton from the late Steve Jobs. But other than the iPhone 5C and a couple new operating systems, we haven’t seen any new products from Apple.

In the meantime, it seems like rivals Samsung and Google are diving deep into the world of high tech hardware.

These competitive pressures (especially in the mobile device market) might be responsible for eroding investor exuberance in shares of Apple.

While it’s a bit speculative to bet an investment strategy on a successful new product, such as an iWatch, any new device or compelling product extension could remind investors that AAPL is a growth-focused company with a track record of innovation. Were the stock market to price AAPL shares for growth, they could easily see 15-25% appreciation from current prices (which don’t seem to factor in growth).

Without the catalyst of an activist investor or new produce launch, AAPL shareholders might just have to wait for regularly improving quarterly earnings announcements to paint a picture of ongoing profitability and revenue growth.

Again, the good news for AAPL bulls is that not even low single-digit growth is currently priced in to AAPL shares; so, even without a catalyst there may be potential upside for those considering an investment in AAPL.

But what are the risks of holding an investment in Apple?

Analyzing the Risks of Investing in AAPL Stock:

There are a number of risks associated with investing in Apple stock. And no matter what your opinion on AAPL after reading this article I encourage you to do more of your own thorough due diligence. My interest in buying AAPL is not a recommendation in any way shape or form to you, especially considering the many risks of investing in Apple.

As for the specific risks of investing in AAPL stock:

To be sure: Apple isn’t exactly a small cap start-up anymore. It’s a massive mega-cap company with a strong cash position, established high margin sales channels and one of the most powerful brands in the world.

But the flip side is…

This also means that money managers, hedge funds and major institutional investors are jumping in and out of AAPL stock. This could mean that while AAPL is definitely liquid it’s also likely to be pushed around. If you’re investing AAPL you should be ready for some short-term volatility given the interest by these big players and the major financial news media. You might have to actively guard against getting shaken our of your position.

Additionally…

Even though AAPL isn’t going bankrupt any time soon, the market perception is pricing in relatively stable cash flow. If cash flows deteriorate significantly in the future, AAPL shares may continue to languish. This slow burn in the share price will be exacerbated if AAPL can’t excite investors with new or improved products. Without a catalyst (either in the form of a new product launch, an activist investor unlocking value or even improved earnings and sales growth), you might be stuck holding “dead money” for awhile if you invest in AAPL. Given the dividend and the margin of safety, this is a risk I’m comfortable with, but you should evaluate it for yourself.

Finally:

While AAPL has a lot of the same top talent it’s always had, some naysayers will undoubtedly proclaim that AAPL died with Steve Jobs. This is made worse because Tim Cook is perceived as a boring but efficient operator/logistician. I think the current valuation reflects this and it’s already baked into the price. But it’s something worthy of consideration.

AAPL Investment Analysis – The Final Word:

Based on the quick fundamental analysis above, I think AAPL presents an interesting opportunity for conservative long term investors, especially those who are fans of AAPL already.

That’s because the current stock price of AAPL is not pricing in any type of growth, and even mid-single digit growth could lead to double digit returns for patient investors in the years to come. Additionally, there is a small dividend of 2.35% and no immediate risks for permanent destruction of capital. For these reasons I encourage you to do more of your own research on AAPL and see if it’s a good investment for you (this article is not a recommendation to do anything in any capacity).

For full disclosure: I own a small AAPL position at a cost basis slightly above the current price. I’m interested in buying more shares of AAPL if the stock slides to 500 or lower.

And By The Way: If you want more information on how to analyze companies yourself, I encourage you to download my free eBook below. You’ll get interesting insight into how to improve your approach to the stock market. I’ll also send you free tools and tips each week to help you improve your long term investing returns.

International Business Machines (IBM) Stock Analysis

International Business Machines Inc (NYSE:IBM) is one of the world’s biggest technology companies. So of course we’re going to do a quick IBM stock analysis here at StockIdeas.org.

Now keep in mind…

IBM hasn’t really gone anywhere for the last year. But don’t take my word for it. Just look at the IBM long term weekly chart below:

ibm long term chart

As you can see from this long term weekly chart, IBM had a nice run. But has traded sideways for the last year (Click to enlarge).

Yet when you zoom in a little bit, you’ll find IBM is starting to show some nice relative strength, And it might have even put in a short term bottom. Now could it be on the verge of breaking out above previous resistance?

See for yourself…

ibm daily chart april 2014

On the daily chart above you can see IBM is starting to trend higher, and even holding above the shorter moving averages. (Click to Enlarge)

As you can see from the technical analysis above, IBM stock is starting to see more buying. RSI is trending up. And IBM is holding above the short-term moving averages. So since IBM looks like it might be setting up for a push higher, let’s look at whether or not the fundamental analysis of the IBM stock supports this potential technical set up.

Now to be sure…

IBM is a massive and multi-faceted company. So it’s necessarily difficult to analyze it comprehensively all in one article. But this blog post will identify some of the more pressing fundamental factors influencing IBM.

And of course, since IBM is such a popular blue chip company, I’m not the first one to try and analyze it. Others have have indicated a $255 price target based on a 5 year dividend discount model. Others point to shareholder friendly IBM management. While my personal favorite, Crossing Wall Street, says to buy IBM up to $197 per share

IBM Fundamental Analysis – Financial Valuation:

IBM is a company at an interesting point. When you look at IBM’s financial stats, Revenue growth has slowed over the last 18 months, and this has been reflected in the stock price. But don’t despair…

This international technology company has continued to grow book value. And Mr. Market may have over-reacted. IBM is currently selling for about $200B in market cap and 11 times earnings, paying a 2.3% dividend.

ibm stock analysis

Does IBM stock present an enticing investment opportunity?

As for the balance sheet, IBM has just shy of $19B in net assets and around $6B in net current assets, with most of it in cash and receivables.

While IBM doesn’t have any immediate balance sheet risk, most of the valuation comes from strong cash flows and (until recently) consistent revenue growth.

Last year’s full-year free cash flow was $13.35B, or $12.10 a share (and $14.94 EPS). So what does that mean?

With a basic intrinsic value calculation, using a conservative 0% growth rate, I determined that IBM is fairly priced around $200/share. That means at these prices, the market is not really pricing in any future revenue growth. If IBM can grow earnings over the next year or two, IBM’s fair value could easily move 10% higher or more.

So that lead’s us to the next question… can IBM grow earnings and shareholder value?

IBM Fundamental Analysis – Growth Narrative:

IBM is definitely a global leader and a world class organization with a track record of execution. But that doesn’t mean it’s smooth sailing ahead. IBM’s hardware business has languished and it’s divesting these less profitable business units. In the meantime IBM is trying to aggressively grow the cloud computing aspects of it’s company.

But that might be a bumpy road…

The cloud services space is competitive, with companies like Amazon (NASDAQ:AMZN), Oracle (NASDAQ:ORCL) and Microsoft (NASDQ:MSFT) also making plays for the corporate cloud. And arguably IBM still has somewhat of a fragmented cloud services offering. Plus, while IBM is more globally diversified it’s still struggling against declining sales in international growth markets.

Nonetheless, IBM management seems staunchly committed to growing earnings and delivering value to shareholders. They’ve even staked their bonuses on it!

From their January 2014 earnings release:

IBM CEO Analysis

IBM CEO Virginia Rometty is tying her bonus to share price. Can she pull it off?

“We continued to drive strong results across much of our portfolio and again grew earnings per share in 2013. While we made solid progress in businesses that are powering our future, in view of the company’s overall full year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013,” said Ginni Rometty, IBM chairman, president and chief executive officer.

”As we enter 2014, we will continue to transform our business and invest aggressively in the areas that will drive growth and higher value. We remain on track toward our 2015 roadmap for operating EPS of at least $20, a step in our long-term strategy of industry leadership and continuous transformation.”

The second paragraph is especially illuminating. And if IBM management can capitalize on their plans, shareholders are sure to benefit. But again, nothing in the future is promised. Not even to IBM. So don’t stop reading yet.

Potential Risks to Investors Identified by IBM Stock Analysis:

While it’s tempting to paint an optimistic picture of IBM, it’s important to be aware of the risks as well. As we said above, the growth story is far from assured, – especially in international markets. And remember how competitive the cloud market is for IBM.

So although management’s track record provides some re-assurance, achievement of the publicly stated targets is not guaranteed. Rumor in the comment’s section of IBM’s Seeking Alpha page is that IBM has an old-school sales force that’s not going to be able to keep up (take that with a grain of salt). And luckily, at the current stock price this appears to be priced in.

Another common critique of IBM is that the company is using debt and selling assets to pay out dividends and bolster revenue. While investors are right to be skeptical, this “might” make sense. Maybe IBM management is taking on long term debt now, when interest rates are good. And so far, their asset sales have been limited to divesting low margin business units.

But skeptical investors are right to keep an eye on these developments. And it’s definitely something I’ll pay attention to going forward. And finally…

The biggest risk with an investment in IBM might be the opportunity cost. While IBM appears to be a reasonable investment, there might be other companies worthy of your capital. AAPL, MSFT and ORCL are also tempting investments at these prices.

I currently don’t own any shares of IBM. I might buy a small position. But this blog post is not any sort of recommendation to buy or sell IBM or anything else. What do you think about IBM as an investment opportunity?

And By The Way: If you want to get more stock market analysis feel free to download my ebook below. You’ll learn how I developed my market methodologies. And you’ll get weekly email updates sharing the best stock market tools and tips to help you become a more intelligent investor.

NetSol Technologies (NTWK) Investment Analysis

netsol technologies ntwk stock analysis

Is the Netsol Technologies (NTWK) team worth investing in?

NetSol Technologies Inc. (NASDAQ:NTWK) provides IT and enterprise application software and solutions for the global financing, leasing and lending industry.

NTWK was founded in 1997 and is headquartered in California. The company also has significant operations in Lahore, Pakistan, as it conducts the majority of it’s business in Asia.

Despite a micro market capitalization of only $42.70M, NTWK works with Dow Jones 30 Industrials, Fortune 500 manufacturers and financial institutions. The company’s operations are primarily centred in Thailand, China, Pakistan and Australia – though it also has offices in London and California.

This article discusses the merits and risk of a common stock investment in NTWK, given current conditions and market perceptions.

NetSol Technologies (NTWK) Background Information and Products:

Netsol Technologies Inc. helps companies use IT solutions to streamline their business. The main product offered by NTWK is NetSol Financial Suite (NFS). NFS drives cost reduction in client businesses by providing end-to-end management of their credit portfolio. This flexible web-based product has helped companies like BMW expand their operations into new markets, and scale for continued global growth (especially in Asia).

On October 24 2013, NTWK announced the soft launch of their next generation platform NFS Ascent – the most advanced platform in the industry.

NTWK’s portfolio also includes the Smart Open Catalogue Interface (SmartOCI) which is an innovative search engine technology that allows corporate buyers and shoppers to browse multiple supplier catalogs within the SAP CRM system. In addition to the products listed above, NTWK also offers a wide array of support services.

Going forward, NTWK’s success depends on the company’s ability to grow revenue and improve profits, capitalize for growth worldwide, penetrate North American markets and continue to streamline sales and marketing operations. Per management’s commentary in their 12/31/13 quarterly filing, they remain optimistic about this progress and are aggressively pursuing their growth goals (more on that later).

Management states most risks to NTWK are macroeconomic in scope. And while investors are wise to consider these risks, they are not company specific. Regional geopolitical risks in Pakistan are also worth mentioning.

But let’s look at Netsol Technologies in a little more depth…

NTWK Competitive Advantage:

NTWK is a globally integrated company with offices in London, Bangkok, Beijing, and Lahore. NTWK leverages this global footprint using a “Best Shoring” approach to help clients and potential customers find the best possible solution and price for their unique situation.

Their 30 years in the business and glowing customer reviews speak to their ability to work with clients to reach an ideal solution. For example:

NetSol Customer Review

NTWK combines this domain expertise with competitive cost blended rates from its “center of excellence” in Pakistan, and other global offices. This unique and cost effective global development model adds value by keeping costs low for global clients without compromising quality.

Another determining factor that makes NTWK’s offerings more appealing to customers are the ISO 9001, ISO 27001, and SEI CMMI Maturity Level 5 (V1.2) assessments; a distinction shared by fewer than 140 companies worldwide (reference). This further establishes market credibility for the relatively small technology company.

NTWK’s release of NFS Ascent in October 2013 is also notable, because this offering is the most technologically advanced solution for the auto and equipment finance and leasing industry. The n-tier service-oriented architecture allows the system to scale quickly.

The company also claims this advanced technology has helped it attract top talent, who are eager to work on the complex software engineering challenges that accompany these advanced offerings. It’s encouraging that attracting top talent while keeping head count costs low is a priority for management.

Now that you’re familiar with the product, let’s talk about how NTWK makes money.

NTWK Business Model Overview and Analysis:

NTWK is a global software company that derives revenue from software license fees, maintenance fees and service fees. Total revenues for the 3 months ended December 31 2013 were $8.7M, with the majority of income coming from services.

Investors may be wary that this recent revenue number is a 26% decrease from the year prior. Why the shortfall?

NTWK management claims this decrease is because current customers are delaying licensing renewals to wait for the official launch of NFS Ascent. If this is true, NTWK will realize a significant revenue backlog in the coming months. To be sure, NTWK still has a large number of customers using the old NFS platform and it expects to continue to collect some revenue from the old platform for a few more years to come.

In the most recent conference call, management indicated it expects maintenance revenue to trend steadily higher and for service revenue to remain steady. The company is well-capitalized for this transition period, while NFS Ascent is rolled out to existing and new clients.

The capital position is important to note because NTWK is under some margin pressure as it grows headcount to support rapid growth goals.

NTWK Market and Niche Characteristics:

NTWK is riding the software-as-a-service trend, providing web-based tools to help companies streamline their operations on a global scale. NTWK is far from the first company to deliver this type of IT solution. And management still sees exciting opportunity ahead.

From their recent 12/31/2013 quarterly report, managements goals are:

  • Achieve double digit revenue growth for the next 5 years
  • Achieve 50% to 55% gross margins in 2015 and maintain 60% or better for the next three years
  • Ramp up license revenues for NFS Ascent™

All this talk is great. But can NTWK back up the numbers?

NTWK Customers, Economics and Financial Performance:

NTWK is a relatively small company, but it has been in operation for over 30 years. And during that time it has developed a robust client base, including “150 satisfied clients in over 30 countries and 250 implementations globally.” These clients include companies such as IBM, Baxter Healthcare and a number of other globally recognized brands. More information on customers is available in the NTWK company profile.

Given the complexity and advanced functionality of the NFS platform and the five applications contained therein, NTWK customers are inclined to renew their software license, rather than shifting providers. The complex integration and deployment of enterprise software solutions means that once NTWK wins an account they are likely to continually generate revenue from that client for years to come.

While NFS earned a modest per share loss of ($0.18) in the last quarter, this is unlikely to reflect the long term prospects for the business. Additionally, although NTWK is suffering a short-term revenue drought owing to the transition between old and new software platforms, it remains under-valued and in a strong financial position.

Notably, NTWK is trading at a market cap of around $42M, with around $30M in net current assets. NTWK is trading at a 40% discount to book value, and even at these depressed earnings levels it is still trading at a price to earnings ratio below 20.

Here is a more detailed look at NTWK’s financial performance over the last 10 years:

NTWK Financial Performance 2014

Via Morningstar

Per the table above the steady growth in operating income and revenue growth should give long term investors confidence, even though EPS and net income have been lumpy. How these trends play out in the next few months will be incredibly telling.

That said, from a very basic discounted cash flow analysis perspective, I believe that even in the current scenario, NTWK is still undervalued. The following simple spreadsheet assumes an inflated cost of capital, and an annual growth rate of only 3%. Based on the earnings history and the narrative from management I believe these assumptions to be very, very conservative.

NTWK Simple Discounted Cash Flow Analysis

The above analysis shows that even if cash flows only grow at 3% a year and WACC is inflated the stock still has an intrinsic value closer to $10, presenting approximately 100% upside from the current price. Even if you reduce the exit multiple by 50%, NTWK would still be about 30% undervalued.

But you must be wondering…

If NTWK is so under-valued, why haven’t investors gobbled up these shares? Good question…

Variant Investment Perspective of NetSol Technologies:

The consensus view on NTWK seems to be “we’ll believe it when we see it.” The market is discounting NFS Ascent revenues because the transition to the platform has been slower than anticipated. In fact, NTWK has been developing NFS Ascent for over 4 years! No wonder market participants are getting a little impatient.

From my perspective, this inability to quickly roll-out the new software program has caused revenue to come in shy of expectations. The CEO indicated as much in the November 8, 2013 earnings report. The revenue contraction along with higher operating costs (due to headcount growth) was seen in decreasing margins and was a catalyst for underwater investors to dump the stock, as evidenced in the chart below.

NTWK Stock Chart 2014

As you can see the stock price of NTWK has taken a bad hit, declining from over $13 dollars to a low of around $4.25. It seems quite possible the selling in NTWK was exacerbated by end of year tax-loss selling, in addition to the November earnings miss.

Over the last few months however, it seems that NTWK has attempted to carve out a bottom. While this bumpy process is far from over (and the stock is still dealing with declining major moving averages), bulls should be encouraged the stock is not moving lower. Insiders of the company also own almost 10% of the stock, and insiders and institutions alike have continued to accumulate share of NTWK (reference).

It is my contention that patient investors who are interested in small cap opportunities may benefit from an investment in NTWK. Of course patience is required, and this bottom might not be THE bottom. But if the company can effectively roll out the Ascent platform revenue should grow according to management’s plan, and shareholders might see capital appreciation as well. Even if the growth plans come up short, our analysis above shows even with very modest revenue growth NTWK is still significantly undervalued.

Of course, an investment in NTWK isn’t without risk. For full disclosure’s sake I am  long a small position of NTWK from around current price levels. I am keeping my position size modest due to the following risks.

Risks of Investing in NetSol Technologies:

NTWK has a strong track record of performance over the last couple of decades. And it seems dedicated to further servicing customers with quality products and custom-implementations. But this investment doesn’t come without risk.

The slow deployment of NFS Ascent remains a large red flag for many investors. If you’re looking for a really quick return you may want to pass on NFS Ascent. Because while it’s possible the company will begin rolling out the new platform with success, you should also be prepared to wait a quarter or two in case these operations take longer than expected (as has historically been the case). That’s a big reason I haven’t stepped up my investment.

Another one of the risks facing NTWK is an inability to penetrate the North American market. Currently, the company  generates around 80% of revenues from operations in Asia. Unfortunately, NTWK faces increasing competition from low-cost competitors in China putting further pressure on margins. Management is planning to drive growth in North American markets to improve margin performance. But we’ve yet to see much in the way of results there.

Finally, especially skeptical readers will note the company recently changed CFO’s. This is likely due to an accounting irregularity which has been covered in-depth here and here. I think this is a case of a small company outgrowing it’s books. But diligent readers will want to review this information for themselves.

In conclusion, NTWK presents an interesting opportunity for patient investors looking to see capital appreciation in the next six-twelve months. This is not a recommendation to buy or sell any security mentioned in this article and I encourage you to do your own research if you’re interested.

And By The Way: If you’re curious to learn more about how I analyze companies, I encourage you to sign up for my free ebook below. You’ll also get weekly updated with tips and resources to help you improve your approach to the stock market. 

Oil Drilling Investments in 2014

oil drilling investments 2014

Are oil drilling investments worth exploring in 2014?

Oil Drilling Investments in 2014 have not performed very well. But does that mean you should pass up on oil drilling investments? Or is 2014 the time to look for value in oil drilling investments before the explode in price?

Well…

In this short article we’ll take a look at some of the risks and tailwinds facing the oil drilling investment thesis this year. And then I’ll share some of the most popular oil drilling investments in 2014. Sound good?  But before sharing my best oil drilling investment ideas and stock picks let’s look at some of the risks associated with investing in oil drillers.

Risks to Oil Drilling Investment in 2014:

Oil drilling investments have lagged in 2014. Despite being relatively cheaply valued there are still some risks that explain why some of the biggest oil drilling investments are trading below book value. So what are they?

One of the biggest risks facing oil drilling investors in 2014 is that there is oversupply of rigs coming into the oil drilling market. This excess of supply means that oil drilling companies are facing pricing pressures. This oversupply is especially risky for oil drilling companies with older rigs, as major oil companies may focus on companies with newer equipment. A reduction in cap-ex by major integrated oil and gas companies could further exacerbate the extra supply.

Beyond the oil drilling market, the rest of the energy mix may present a headwind to deep water oil drillers.  While this risk is a little more speculative it’s hard to ignore the momentum of renewable energy and the natural gas boom. While it’s hard to quantify the immediate impact these emerging energy sources will have, it’s important for oil drilling investors to remember that alternatives to black gold are always being pursued.

Finally, even if all of the macroeconomic risks aren’t materially important, oil drilling investments are not without an intrinsic risk. That’s because oil drilling is a dangerous activity to begin with. Oil investors need to assume some risk based on the possibility of spills or other accidents that could lead to lawsuits. Focus on companies with strong safety records and commitment to effective operating procedures.

But I don’t want to paint too negative of a picture. Oil drilling investments also have a lot of potential upside in 2014…

Benefits to Oil Drilling Investments in 2014:

Despite the risks associated with oil drilling in 2014, the benefits to oil drilling investors are also hard to ignore. Most oil drilling companies have strong histories of operating profits. And these track records are likely to continue out into the future.

For one thing, it’s unlikely that new oil drilling companies will enter the space. There are a couple of big and established players. And given the complex and harsh environment oil drilling companies operate in, there is a significant barrier to entry. This provides a little bit of a competitive moat for those oil drilling investments that have already strongly established operations. In fact, despite the oversupply of rigs coming online, a number of the oil drillers already have significant backlog of revenue booked for 2014.

With that in mind, long term oriented investors may want to start fishing for value in the oil drilling investment opportunities. If you are looking for a long term place to park capital oil drillers might make sense. Plus, a lot of the oil drilling investment opportunities in 2014 pay strong dividends, so investors will accrue the benefit of getting paid to wait. So what oil drilling investments should we be looking at in 2014?

Oil Drilling Investment Examples in 2014:

There are plenty of different ways to find oil drilling investments in 2014. A great place to start is by reviewing the oil and gas drilling and exploration industry. That way you can find oil drilling investment examples that meet your personal criteria (whether that’s a big dividend, a margin of safety, or something entirely different).

One popular oil drilling investment in 2014 is Transocean Limited. You can read my previous RIG analysis here to see why this major oil driller has attracted the interest of activist investor Carl Icahn. Unfortunately, I think RIG faces some headwinds in the form of an older fleet of rigs, and there are some better oil drilling investments for 2014.

For example, SeaDrill Limited and Ensoco are oil drilling companies that have newer fleets and a backlog of orders in 2014, making them relatively attractive oil drilling investments. To be fair, the stock price of both companies appears to be in a bit of a downtrend. But these might be examples of relatively safe oil and drilling investments for longer-term oriented investors.

For full disclosure I am long a small amount of ESV at the time of writing. I like the company because it pays nearly 6% in dividend and is trading just below intrinsic value. The company also has a strong track record of delivering shareholder value. What oil drilling investments are you contemplating in 2014?

And By The Way: If you’re looking for more information on how to find under-valued stock market opportunities you may want to download my free ebook below. You’ll also get free tools, resources and tips each week to improve your approach to the stock market. 

Semi Conductor Investing in 2014

semi conductor investing 2014

Are semi conductor stocks worth an investment in 2014?

Semi Conductor Investing in 2014: Is this finally the year Semiconductor investors strike it rich? While I’m hesitant to be too alarmist in my introductions, semiconductors might be worth a look if you are in the market for investing opportunities. So…

In this blog post we’ll look at why semiconductor companies might make a good investment in 2014, as well as a couple actionable ideas you can pursue on your own if you think semi-conductor investing is the right fit for you. Sound good?

Semi Conductor Industry Long Term Technical Analysis

The Semi Conductor industry had been dead money for investors for over 10 years. And semi conductor investors have been unable to see any capital appreciation in the period. Just take a look at the semi conductor industry ETF (SMH) below…

semi conductor long term chart

Look at this decade long consolidation in the semi-conductor industry. Could it finally be moving higher?

As you can see in the chart above, the semi conductor industry is up against decade long resistance. And while volume has been low running into this resistance, SMH might finally be poking it’s head up against this impenetrable trend line.

Of course investing in the sector ETF is an easy way to get semiconductor exposure in 2014. But if you want to dig deeper into specific companies, here are some of my favourite ways to invest in semiconductors this year…

Under-Valued Semi Conductor Company for Investing in 2014

One under-valued semi conductor company that may be of interest to investors is United Microelectonics Corp (UMC). This semi conductor company is trading at a 30% discount to book value, and the P/E ratio is just above 11. The company also has a relatively light debt burden and should return more free cash flow to shareholders in 2014 after a large year of capital expenditures.

Unfortunately, UMC might be nothing better than a cigar-butt investment scenario. While this semi conductor company is trading below book value, a lot of the company’s assets are in plant and equipment. Unfortunately despite the recent upgrades UMC still lags competitors in terms of competitive advantage and UMC continues to lose market share. So although it appears UMC is undervalued and we might see a bounce higher, it’s not an extremely compelling stock investment idea if the company is struggling to make money going forward.

So are there any other semi conductor investing ideas you can pursue in 2014?

Is This The Best Semi Conductor Company for Investing in 2014?

The leading semi conductor manufacturer in 2014 continues to be Taiwan Semi Conductor (NYSE:TSM). TSM is not exactly a value investor’s dream. But it’s not crazy expensive either.

Hear me out…

TSM is trading at about 3 times book value, which makes it expensive in the eyes of most value investors. On the other hand, the company has a P/E under 15 and last year generated almost $12B of operating income (vs an enterprise value of about $88B). While semiconductor manufacturing is still a capital intensive business, there is lots of free cash flow leftover for management to work with (and hopefully direct towards shareholders).

From a technical analysis perspective, I also like the way $TSM is basing out. Take a look at the monthly chart below…

taiwan semi 10 year long term

As you can see from the chart above, TSM is not too extended on the monthly time frame, and if the SMH sector finally moves higher in 2014, TSM could be the main beneficiary. Further, it’s hard to see how TSM could lose market share since it already commands over 50% of the market. So in this case, I might start a position if the stock breaks out of the triangle pattern above and then be a bit more disciplined with my stop loss (since the Graham Number value for the stock is closer to $13). Make sense?

Another best in class play on semiconductor investing in 2014 would be Intel (NASDAQ:INTC). I don’t love the technical pattern as much but it stacks up very well against TSM on the valuation metrics above (like free cash flow yield).

And By The Way: If you’re looking for more information on investing decision making I encourage you to download my free ebook below. You’ll get a ton of valuable perspective on how I’ve refined my approach to stock markets over the years, and that should help you improve your trading too!

Transocean Ltd (RIG) Analysis 2014

Here’s a Transocean Ltd (RIG) Analysis for 2014. RIG came to my attention after a follower on Stocktwits mentioned it as a potential value investment opportunity. At a glance, RIG is trading to a discount to other publicly traded oil and gas exploration companies. So I thought it was worth further analysis:

Fundamental Valuation Overview:

RIG caught my attention and warranted further analysis because of the conservative fundamental valuation the company receives. Compared to a number of peers RIG appears cheaply valued. This is seen in the low PEG ratio, the sub-10 PE and the share price hovering below book value. While RIG has modest debt levels the current ratio near 2 implies liquidity is not a pertinent threat. And really…

It’s not often that you see major large cap companies trading at a discount to both current and future earnings, as well as a discount to assets (book value). To sweeten the deal, RIG also pays a 5% dividend.  Arguably the oil exposure is also a bit of a hedge against inflation in the coming year or two. And while all of this is what value investors love to see, there must be a reason for this cheap valuation, right?

RIG has been dead money for almost 2 years now. But it looks like some of these problems might be in the rear view mirror, so let’s dive a little deeper…

RIG Growth Narrative Analysis:

RIG has under-performed the market the last couple of years.  Margins have come under pressure due to under-utilization and lower day rates. While global growth remains slow, it’s reasonable to expect oil demand to slowly increase over the coming years. New deep water discoveries in the Gulf of Mexico also bode well for the future of RIG.

And while new exploration projects obviously provide future revenue potential, there are also a lot of new rigs scheduled to come on line in the coming quarters. Investors will want to be wary that oil prices and margins could remain under pressure. Luckily, RIG does have a premium positioning in the market…

For example, RIG has a backlog of orders, and a lot of them are in the ultra-deep segment where the company is already at 100% utilization and continuing to invest heavily. It’s nice to see RIG with such a strong grasp on this important segment of the oil discovery market as it infers something of a competitive advantage.

However a final red flag investors will want to be wary of is the shortcomings of management in the past couple of years. While activist investor Carl Icahn has announced a 5%+ stake in RIG, replaced the CEO and got a couple of seats on the board, RIG is still a big ship that will take awhile to turn around. The company has been improving efficiency and looks to be on track. But investors may need a few months of patience before seeing meaningful capital appreciation.

Speaking of patience: When analyzing companies for longer-term investment, it pays to look at how the price action relates to the fundamentals. So let’s take a look at RIG stock charts on a few different time frames..,

RIG Technical Analysis Long Term:

RIG Monthly Jan 2014

Click to enlarge this annotated monthly chart of RIG and see the big picture story of price action

RIG Technical Analysis Medium Term:

RIG Monthly Jan 2014

Click to enlarge this weekly chart of RIG to see the controlling technical price pattern

RIG Technical Analysis Short Term:

RIG Daily Chart Jan 2014

Click to enlarge this daily chart of RIG for short term technical analysis.

RIG Analysis Conclusion:

So there you have it. RIG would probably be a safe bet to add to a long term portfolio. I would personally wait for the recent selling to stabilize before dipping a toe. But if you’re in it for the long term this doesn’t seem like a bad price to own some Transocean. While RIG looks tempting management’s ability to deal with oversupply issues or CapEx challenges remain discounted by the market. For those reasons, I think I’ve found another similar idea I like even more. But I’m going to keep that one for premium subscribers.

But If You’re Still Curious:  You might be interested in signing up for the free email analysis and updates below. You’ll get exclusive access to my free mini-ebook that explains how I consistently cash in capital gains using a combination of swing trading and value investing.

British Petroleum (BP) Quick Analysis

BP Analysis

Despite all the controversy, is BP a good stock idea?

British Petroleum (NYSE:BP) is a stock idea I’ve been looking at lately. So I wanted to share a part of my analysis with you. I’ll give you a quick overview of my fundamental thesis. And then I’ll share some charts with you so you can see the thought around my buying and selling plans. Does that sound okay?

So let’s cut to the chase, here’s my Quick Analysis of British Petroleum (BP) going into 2014…

BP Quick Fundamental Analysis:

The fundamental value case for BP is pretty obvious. The company’s valuation is still suffering from undefined and somewhat open-ended liabilities from the Gulf of Mexico oil spill a few years ago. Since then, the company’s share price has languished. As a result…

BP’s stock is trading at a huge discount to peers like XOM and CVX on practically every valuation metric. Arguably, money managers are paying a significant premium for the safety of these bigger oil giants. The stock has been dead money since the disastrous spill, but litigation is coming to an end and the company might be on the verge of turning over a new leaf. But there’s something else you should keep in mind.

BP has a book value in the low $40s. These are hard assets that will continue to generate cash, so there is somewhat of a floor in the price of the stock. BP is also winning contracts in the Middle East and Asia. You might also argue the price of oil has been relatively subdued in 2013… (especially considering all the QE!)… Thus materials might be a significant theme going into 2014 and BP could be a profitable way to play the upside. Not only do you get possible capital appreciation from earnings growth and oil prices but, the company pays a high dividend yielding about 5%. That’s not a bad proposition, is it?

But you don’t have to take just my word for it…

Seth Klarman’s Baupost Group also has a sizable position in BP. They’ve reduced their holdings a little bit, but still hold 5.5M shares. I don’t usually pay too much attention to what other traders are doing. But Seth Klarman’s Margin of Safety Philosophy is one I am particularly interested in. On that note, if you invest with the Graham Number, you get a price target of BP for somewhere north of $70.

BP is also becoming more aggressive in pursuing fictitious lawsuits. To be sure, BP should be held accountable for all of the liabilities of their oil spill. But as a shareholder (the cold truth is) it is nice to see management flexing their muscles for you. Another reason I’m interested in BP is because I need some exposure to the energy/commodity/oil space. A lot of my portfolio is focused on financial service companies right now and BP provides a relatively safe play in energy markets where I lack exposure.

But the reason I’m interested in quickly analyzing BP isn’t only fundamental…

British Petroleum (BP) Long Term Technical Analysis:

When I’m considering trading around stock ideas I always want to keep the technical analysis in mind. While I get my conviction from the fundamental analysis I also take technical analysis into consideration for trading. To be fair, my chart work isn’t anything groundbreaking. But looking at the price action keeps you in an objective frame of mind…

Below is a Long Term Weekly chart of BP. You’ll notice that the stock has been trading in a relatively low range for the past few years. More recently, the trading range has tightened up and the stock might be breaking out of the consolidation pattern.

BP Long Term Technical Analysis

BP Long term technical picture might indicate a large base to jump higher from (click to enlarge).

Now let’s zoom in on the technical analysis of BP…

British Petroleum (BP) Short Term Technical Analysis:

While the long term chart pattern analysis for BP is encouraging, the short term technical analysis is also looking increasingly promising. You’ll notice the strong buy volume on the chart below. It looks like large buyers are supporting the price as it slowly gaps higher from the long term consolidation pattern.

BP Short term technical analysis

In the short term, buy volume seems to support a BP breakout to areas of low overhead resistance.

Another interesting feature is the blue horizontal line on the above BP daily chart. This represents long term resistance (also seen on the weekly chart) – and there is something of a “volume vacuum” above that price area. This could indicate a quick move higher for BP in January 2013 if the stock keeps pushing higher. Of course BP is riding the upper Bollinger band so it’s a little tough to chase at this point.

For Full Disclosure: I am long BP from just over $46 and am looking to buy any pullback. Please do your own research as this analysis is for educational purposes and is not intended as a recommendation to buy or sell BP stock.

And By The Way: If you’re still looking for more stock ideas I encourage you to sign up using the email form below. You’ll get free exclusive-email-only stock ideas and analysis not seen anywhere else. Why not give it a try?

Is TINY a Value Trap?

Is TINY a Value Trap?

Is TINY a Value Trap?

I think I made a mistake. My investment in Harris and Harris Group VC (NASDAQ:TINY) might have been a few years too early. So in this blog post I will explain to you why I think TINY is a value trap.

If you haven’t spent much time analyzing TINY before, let me quickly bring you up to speed on the positives to the investment, as well as why this small cap nanotechnology company might be a value trap.

The Bull Case for TINY: Innovation and Value

I first started looking at TINY as an investment idea in early 2013. And in that analysis I detailed the interesting opportunity TINY presented. You don’t often find such innovative companies trading at such low valuations.

And most of these fundamental measures are  true to this day. For example:

TINY is still the only public venture capital company. It is also still debt free and has even realized some gains from a portfolio company in the last few months with the sale of Xradia to Carl Weiss Group. So why is TINY a value trap?

Why TINY Might be a Value Trap:

Even though the fundamental value of TINY looks strong, it’s only a good investment if you can earn a significant return on your invested capital. And from that perspective, shares of TINY don’t look all that attractive. Let me show you what I mean…

Public companies are often hungry to meet analyst expectations each and every quarter. As  result of this, management often takes shortcuts that are detrimental in the long term. While TINY does not have this problem, it does have the exact opposite.

TINY is not concerned with analyst expectations this quarter, or for a few years in the future. Management continues to make this clear. And arguably, this is because the venture capital industry (by it’s very nature) is a little bit more long-term than most traditional operating businesses. But I think in the case of TINY, management has used this narrative a bit too much, sometimes to hide their own shortcomings.

As a result of this long term time frame and the nature of the venture capital industry, investors are starting to lose faith that TINY can ever turn a profit. And the resulting price action is turning TINY into a possible value trap.

Even if TINY does eventually become profitable, investors are unlikely to earn a return for a few years to come.

TINY Technical Analysis: The Definition of a Value Trap

When you look at the daily candlestick chart of TINY it’s pretty obvious that the stock is not performing.  It has not seen any meaningful buying in months. And the stock looks eager to explore all time lows. What’s with all the selling?

One possible reason is:

At the end of June, TINY was delisted from the Russel 2000 index. This resulted in a lot of selling that drove the stock price down (as funds that invested in Russel companies rebalanced) – leaving TINY out in the cold.

Since then, buyers have yet to regain control of the stock and any nascent jumps in the stock have been faded aggressively. On no matter which timeframe you look (monthly, daily, intra-day) TINY has yet to show relative strength or a trade-able bottom.

Is Investing in TINY Trapping Your Capital?

As always, I encourage you to do your own research. And you should also think about how an investment in TINY fits in with you own investing strategy. If you’re looking for a short term trade, TINY is decidedly not for you.

The reason for that is…

It’s pretty safe to assume that TINY is 3-5 years away from generating any significant shareholder value (through IPOs or exits in portfolio companies)… and…

Without this kind of significant catalyst on the horizon, it’s unlikely there will be a sustainable move higher in the stock price of TINY – making it a value trap. On the other hand, if there is a positive surprise, TINY could explode at least 25-30% in value.

But I think the more likely case is TINY continues to amble along slowly (trapping value). Portfolio company revenue is likely to keep growing, but I’m skeptical that will translate to shareholder value in the near future.

While TINY presents an interesting opportunity to invest in disruptive technology at a good valuation, management has not been shareholder friendly and this company is years away from a home run.

Do you think TINY is a value trap?

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Synovus Financial Corp Stock Analysis (NYSE:SNV)

I thought you might enjoy a quick a look at one of the stock’s I’ve been buying. So here’s a brief Synovus Financial Corp (NYSE:SNV) Stock Analysis.

Synovus Financial Corp Fundamental Analysis: Growth Narrative

Synovus Financial seems to be at something of a turning point. They’ve reduced their operating and credit costs, improving profitability dramatically in the last year. Their non-performing loans are also decreasing sharply each quarter.

Synovus Financial Corp Fundamental Analysis: Mis-Priced Earnings

Plus, SNV just unveiled how they are repaying their TARP debt last week. And the market is eating up the secondary offering. Since the early earnings release that accompanied the SNV TARP news, the stock of Synovus Financial has risen almost 10%. SNV debt has also been upgraded by Fitch, with a positive outlook. Moody’s recently upgraded SNV, too.

Other than Goldman, analysts have been busy upgrading SNV and (raising the price target to boot).

Improving macro-outlook aside: From a valuation perspective, Synovus looks fairly priced.

SNV stock has just started to trade at a small premium to book value. Generally, I try not to buy anything above book value. But in this case I’m comfortable adding to my position because the price/book has only recently edged above 1. Additionally, SNV appears cheap relative to earnings – with a P/E of just under 4 and PEG ratio of 0.48 (see video above)

So…

As long as the Georgia real estate market holds up, I think the fundamental case for SNV is quite strong. Some have their doubts about this assumption, but for now I’m bullish.

If you’re still not convinced, let’s look at the price action of Synovus Financial Corp…

Technical Analysis of Synovus Financial Corp:

SNV has been showing improved technicals as the year progresses. The stock is in a clear uptrend, and on a shorter term timeframe, has held the recent gap higher – which I highlighted on Twitter a few days ago…

SNV Technical Analysis 2013

SNV holding support after a recent breakout

Additionally, on the daily time frame, the longer term moving averages are all nicely lined up – further confirming the bullish trend. The large buy volume on the recent breakout is also encouraging.

Finally, it’s worth mentioning how the price action of SNV is acting constructively. Specifically, there seems to be firm support at 3.25. And though Synovus Financial is over-bought, judging by bollinger band analysis, the character of the price action is healthy. In particular…

Synovus Financial stock is grinding sideways and slightly higher (on very high volume) rather than being violently rejected from prior overhead supply. I think this is the most the bulls can hope for right now – but it can go on for awhile. I also would not be surprised by a bit of a pullback in the days to come, and will be a buyer on dips. Such is my analysis of Synovus Financial.

[update: as of close on July 24 SNV is at 3.35, closing slightly off the highs of day, at new 52 week highs. I view this as constructive.]

What do you think about SNV? Bullish or bearish?

FMD Analysis: First MarbleHead Corporation

One stock idea I am looking at right now is First MarbleHead Corporation (NYSE:FMD). I will update this page with a more in-depth FMD Analysis later.

For now, you can use my quick review to decide if FMD warrants further investment research.

Sound good?

FMD Analysis: Dollars for Cents

When analyzing FMD, the first thing that becomes obvious is the fact that FMD common stock is trading for cents on the dollars. The company has about $192M in cash, but the market cap is only $134.86M. That’s a valuation discrepancy I can get behind.

That’s not the end of the FMD fundamental analysis though. There’s more. While FMD has fallen off of it’s 2007 highs, management might finally be getting control. They’ve cut costs, and managed to turn cash flow positive the last three quarters. Sales and marketing initiatives are also being implemented and may yield increased revenue.

FMD Technical Analysis: Trending Up To Resistance

When you look at the chart of FMD, a few things become clear…

  • FMD has been in an uptrend since January 2013. Since this time it has moved up 100% off the lows.
  • The recent advance has been populated with big buy volume indicating buyers of size may have been accumulating just under $1.00/share.
  • FMD has traded up to resistance at around $1.10-$1.30. It is consolidating against this prior resistance level. There seems to be a firm bid below $1.20 and large selling above $1.27 – it’s a battle ground.
  • The 50, 100 and 200 day moving averages are sloping up on the daily time frame.
  • On the weekly time frame, the 20 period moving average has crossed over the 50 period moving average. The 200 period moving average has more or less flattened out around $1.70.

I like the 200 period MA on the weekly timeframe at $1.70. This also presents