Stock of the Day - January 10, 2009

Apple Inc. (AAPL)

Apple Inc (AAPL) is a leading provider of hardware and software, selling and designing products such as the Macintosh computer, the iPod, and the iPhone.  Apple’s stock price has been cut by over 50% this year due mostly to macroeconomic reasons, as its 52-week high was $192.24 and it is currently trading at $90.58.  I believe there are 5 extremely important factors that will greatly influence Apple’s stock price in the coming months and years.  I will go through each of these factors in detail to help you better understand what will make Apple’s stock go up or down in the future, and whether or not investing in Apple is a good idea.

(1) Steve Jobs, the CEO and co-founder of Apple, is crucial to the success of the company.  He is a great leader who is credited with many of the amazing innovations that Apple has brought to the market.  Because of his importance to the company, he is also extremely important to the company’s stock price.  A respected writer for Business Week claims that “there is a premium of anywhere from 15 to 25 percent built into Apple’s share price because Steve Jobs is the CEO.”  So, if Jobs were to ever unexpectedly resign due to health reasons, Apple’s stock would be absolutely crushed.  It is not too bold to say that Jobs’ health is in doubt, as rumors have been swirling around for a very long time.  The CEO, who used to have pancreatic cancer, looks weaker than usual and he has been losing a lot of weight recently due to a “hormonal imbalance”.  Personally, it scares me when someone so important to a company has these types of health problems, and it automatically makes me more wary of the stock’s potential.

(2) The smart-phone market is becoming extremely competitive as the big players in the market are regularly coming out with better phones.  After Apple came out with the iPhone 3G, Research in Motion (Blackberry) came out with the Storm and the Bold, and Palm just recently released its newest phone, the Pre.  The iPhone’s biggest competitor is and will probably be the Blackberry Storm, as it is a touch screen phone as well.  In the battle between the iPhone and the Storm, I definitely think the iPhone will win out.  The Storm just isn’t that great of a phone from my first-hand experience and from multiple surveys, as only 33% of Storm owners said they “very satisfied” with their phone in a ChangeWave survey.  When the original iPhone came to the market in 2007, 77% of iPhone owners were “very satisfied” with their phones.  I think this disparity in satisfaction says a lot about the future of the two phones.  It sure seems like people like iPhones more than Storms, and this preference will play out well for the iPhone in the long term.  When combining consumer preference with the fact that the iPhone’s market share in the smart-phone market has been growing at an explosive rate (currently at 22%), the future looks bright for the iPhone and for Apple. 

(3) Macintosh computers, including the popular MacBook, accounted for 44% of Apple’s total sales in 2008.  While Apple still has a lot of work to do to become the leader in the U.S. computer market, its market share in the U.S. has grown from about 3% a few years ago to 8% in the 3^rd quarter of 2008.  The upcoming year will be important for both Microsoft and Apple, as they are both coming out with new products.  Microsoft will introduce “Windows 7” to the market soon, and Apple is also expected come out with “Snow Leopard” sometime in 2009.  From the research and reading that I have done, it looks like both of these upgraded softwares are going to be impressive.  The thing I like about Snow Leopard is that it will be able to easily transfer a lot of Windows programs that were once exclusive to Windows, thus allowing more people to make the switch from Windows to Macs without a problem.  The computer market has obviously been hurt due to the state of the economy, but when the economy turns around, it will be interesting to see which operating system garners more attention.

(4) The iPod is Apple’s most dominant product, as around 70% of all MP3 players are iPods.  They have become must-haves in today’s world, and many people have more than one.  The iPod’s name recognition is so strong and it is such a popular device that it helps Apple’s brand awareness for the company’s other products.  People have become familiar with Apple because they see the iPod everywhere, and this exposure has led more people to be interested in iPhones and MacBooks.  iPod’s have become so popular that they are as fashionable as they are functional, and I think that iPod sales will continue to be strong for many years to come.

(5) The final factor that I believe influences Apple’s stock price is the company’s image in society as an innovator.  The company has an image of being trendy and cool that its competitors wish they could match.  Both the iPod and the iPhone have left competitors eagerly trying to match them with products such as the Microsoft Zune and the Blackberry Storm, but no one has been able to achieve the same image that Apple has.  Granted, Apple spends a ton of money on advertising, but it is worth it considering how strong their image has remained and considering how popular they are among younger generations.  I have a MacBook, and I would say over 75% of my classmates have them as well.  As our generation grows up and goes into the workplace, I believe we will keep our love for MacBooks alive.  If what I am saying comes true, Apple will continue to see unbelievable growth for many years to come, as more and more people will continue to switch from PCs to Macs.

So the question becomes, should you buy Apple?  With the company’s impenetrable brand image, and with its extremely popular products that will continue to grow in market share as the years pass, I think that Apple is one of the best long-term investments in the stock market.  I wouldn’t buy it yet, though, as the bad economy will pull the stock price down a little further before it moves back up.  Personally, I will buy shares in Apple the day that it gets to $80 or below (it is currently trading at $90.58).  Lets hope it goes down that far, and if it does, I urge you to pounce on the opportunity to make some money with me. 

 

Niki Pezeshki

College Trillionaire

Market Recap - January 9, 2009

The last day of the first full week of 2009 wasn’t a good one for the markets as the Dow Jones Industrial Average dropped 143 points (-1.64%) and the S&P 500 lost 19.38 points (-2.13%). Today’s losses look to be the result of more news that has shaken investor confidence. The biggest stories of the day were the announcement of December unemployment rates, a potential merger part merger between Morgan Stanley (MS) and Citigroup (C), and the resigning of Robert Rubin from Citigroup.

Analysts that predicted around 550,000 jobs were lost in December were wrong, as the Labor Department announced that employers cut 524,000 jobs. The number is still very large, but it is not as dismal when considering that many people thought that the figure would be even worse than the estimated amount. To investors, lost jobs are lost jobs and today’s drop in the market can largely be attributed to the announcement of unemployment (which is now a depressing 7.2%).

A cash-hungry Citigroup is negotiating a merger of their Smith Barney division with a division of Morgan Stanley.  This news comes at the same time as the resignation of a key member of Citigroup: Robert Rubin. Rubin, a former U.S. Treasury Secretary, played a large role at Citigroup during the last decade as a prominent director. He has come under a lot of criticism and some blame him for leading Citigroup into taking on risk that has caused them to be where they are now. Citigroup’s shares lost 5.73% today.

We have to find good news in the bad. It is definitely good that the unemployment numbers weren’t as bad as many people predicted. Investors will be challenged again next week as more 4^th quarter company reports  will be coming out.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 9, 2009

Market Indexes

Indexes are the single most prominent source of information about the financial markets for investors. Every time you turn on a financial news channel like CNBC or open the Wall Street Journal you will see countless references to indexes like the Dow Jones or the S&P 500. You need to know how they’re created and how to interpret the information they report.

In general, a market index is simply a selection of stocks. For example, the Dow Jones Industrial Average is composed of 30 major stocks that people believe to be a good representation of the market.

Different markets are calculated using different methods. Specifically, the Dow Jones is calculated using a “price-weighted average”. The value of the Dow Jones is simply the prices of all its stocks added together divided by the total number of companies. So if the Dow Jones consisted of 3 companies, A (price $10 per share), B (price $15 per share), and C (price $20 per share), then the value of the Dow Jones would be:

                                                    (10 + 15 + 20)

                                    ----------------------------------------       =   15

                                                             (3)

Remember that this is a simplified version. The actual Dow Jones Industrial Average uses a divisor (denominator) that accounts for historical events like stock splits and inflation. So when you see that the value of the Dow Jones is 9000, this number is simply all the prices of its companies stock added together, divided by the divisor Dow Jones creates. This is why the number of the Dow Jones is much larger than an average like 15. The thought process that works for the simplified version still holds with the actual version, so you should use this when interpreting price-weighted indexes.

It is very important to note that the price-weighted average method causes changes in high price stocks to have a much greater effect on the index than changes in low price stocks. This is the same equation for all indexes that use a price-weighted average. If a company like Google (GOOG), that has a price of around $300, loses 10% of its price their stock price would drop $30. If a company like General Electric (GE), that has a price around $16, loses 10% of its stock price then their stock price would drop $1.60. You can see the much bigger effect GOOG has on the index than GE.

But the explanation of indexes doesn’t stop here. The two other most prevalent American indexes are the Standard & Poor’s 500 (S&P 500) and the Nasdaq. These indexes use the “market value weighted method” instead of the price-weighted average method. The market value weighted method is similar to the price-weighted average method, except this form multiplies the stock price times the number of shares outstanding. So let’s say our companies A (price $10 per share, 100 shares outstanding), B (price $15 per share, 150 outstanding), and C (price $20 per share, 200 outstanding) are in the S&P 500 this time. The value of the S&P would be:

                                                                                                                                                                                                                  (10 X 100)+(15 X 150)+(20 X 200))/(3)=2416.7

The S&P 500 and the Nasdaq both also use their own divisors to account for historical stock splits and other changes that would distort their indexes.

Ok, we’re almost there. The last thing that you need to understand is the percentage that is given next to a change in points of the market. Often you’ll see something like “The Dow was down 90 points today (-1%). This percentage is simply the percentage change from the ending value of the Dow the day before. Lets say the Dow ended at 9000 points yesterday. If it loses 180 points today, then the quote would be “The Dow was down 180 points today (-2%) as it settled at 8820.” You could find this percentage by taking the number of points the index gains or loses and dividing it by the ending total of the day before. In our example you would take:

                                                               180

                                                         -------------    =   .02 =  2%

                                                              9000             

So now you (hopefully) understand how the indexes move. But which index should you use to judge the market? The Dow Jones Industrial Average is the most widely referred index because it contains 30 benchmark American companies and it has been around for a long time (since 1896). You should definitely pay attention to the Dow. But as of right now, most investors consider the S&P 500 to be the very best representation of the market for several reasons, including their use of a market value weighted average instead of a price-weighted average.  Most money managers and investors compare their performance to the S&P 500 to judge how well they have done compared to the overall market.

Additionally, you should choose different indexes to analyze different stocks. The S&P 500 only represents Large Cap companies (large companies with a market cap bigger than 10 billion). If you wanted to see how Small Cap companies are doing (market cap form 300 million to 2 billion) you could check the S&P 600. If you wanted to analyze an index that covers almost every company that is publicly traded, you could check the Wilshire 5000.           

I know this stuff is a little confusing, but having a good understanding of what indexes actually mean and how they work will give you an edge over most investors (not many people know what you now know). And any edge in the investing game is invaluable.

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 8, 2009

Dividends

Dividends are payments declared by a company and given to its shareholders directly out of the company’s earnings. The payments are usually given as cash or as more shares in the company.  While companies are not required to pay dividends, it is usually seen as an advantage by investors because it is a stable and reliable source of income. 

As a basic example to explain how dividends work for an investor, we will use “Investor A” and “Company B”.  If investor A has 1,000 shares of Company B at $10 per share, then Investor A has $10,000 invested in Company B.  If company B pays a dividend of $0.50 per share (a 5% dividend yield), then Investor A will receive $500 per year strictly from Company B’s dividend ($0.50 per share X 1,000 shares).  

I am going to use Motorola (MOT) to show how dividends work in a real-world example.  Motorola is currently trading at $4.53 and has a dividend of $0.20 per share (a 4.41% dividend yield).  If you owned 10,000 shares of Motorola, you would have $45,300 invested in the company.  Every year, you would receive $2,000 from the company directly from the dividend payment ($0.20 per share X 10,000 shares). 

Dividend yields are also very useful when analyzing a company’s dividend payout.  Dividend yields, which are percentages, describe the rate of return you receive on your investment strictly from the dividend payout.  Going back to the Motorola example, if you invested $45,300 in the company and received $2,000 annually from the dividend, you would be getting a 4.41% yield. The easiest way to figure out the dividend yield is to divide the dividend per share by the stock price.  In the Motorola example, you would divide $0.20 by $4.53 to come up with a yield of 4.41%.  One interesting thing to note is that as a stock’s price increases, its dividend yield decreases even though its dividend payment remains the same.  On the other hand, if a stock’s price drops, its dividend yield increases because the numerator in the equation stays the same while the denominator gets smaller (it is simple algebra). 

What do companies do with their surplus profits? Some companies use their surplus incomes to fund new projects that will boost their growth.  Companies that focus more on growth usually do not pay dividends, as they use the excess money for research and expansion purposes.  The rationale of not paying a dividend is that investors will receive greater returns on their money if the company they invested in finds ways to grow its business by using its excess profits in productive ways instead of paying them back out to the investors in quarterly payments. 

In times of economic weakness and recessions, dividends become extremely desirable.  Not only do dividend yields greatly increase because of decreased stock prices, but dividends are reliable payments and sources of income for many investors.  No matter what happens to Motorola’s stock price in a recession, it will continue to pay out $0.20 per share to investors. That is enough for many investors to stay in the game, even in today’s unpredictable market.

 

Niki Pezeshki

College Trillionaire

Stock of the Day - January 8, 2009

Southwest Airlines

Southwest Airlines (LUV) is stuck in its position as the “best house in a bad neighborhood”.  Compared to its competitors, Southwest is doing relatively well.  But, instead of taking the next logical step and saying that the airline company will do well as a result of its relative advantage, I believe the fact that Southwest is doing relatively well only reveals just how poorly the airline industry has been recently and how poorly it will fare in the future.

Southwest Airlines, a company that many of you are familiar with, was the largest provider of scheduled domestic passenger air travel in the U.S. in 2007.  The company specializes in low fare, point-to-point, high-frequency service. 

Southwest Airlines is definitely the financially strongest U.S. airline, as it has posted 35 consecutive years of profitable operations.  The company has a solid foundation of cash, and it has one of the industry’s lowest cost structures.  It has kept its costs low by flying only one aircraft type, by offering mostly non-stop flights, by avoiding many congested airports, and by holding down food costs. 

The positives don’t hold much traction, though, when comparing them to the negatives that outweigh not only Southwest Airlines, but the whole airline industry.  The domestic airline industry consists of 11 major airlines, which basically means that Southwest has a lot of companies to beat out in order to attract customers.  This competition results in extremely low profit margins, as ticket pricing is also extremely cutthroat among all of the airline companies. Labor in the airline industry is also mostly unionized, which keeps companies like Southwest from making major labor cuts during tough economic times.

Without a doubt, Southwest has a competitive advantage over other airlines because it offers so many non-stop, quick flights and has such high flight frequency (less ground time and more time in the air).  It also flies to many airports that its competitors do not stop at, leaving Southwest as the main option for many travelers.  Recently, though, Southwest has made plans to begin expanding the range of its flights into Canada and more airports in the Northeastern United States.  While this may sounds exciting for people who smell growth, I think that it is unhealthy for the airline to stray from its competitive advantage of quick flights that have helped it become the leader in its industry. 

Business travel and Leisure travel – The two components of demand in airline travel – have taken a dramatic dip as a result of the global financial crisis.  As a result of the huge drop in demand, airline companies like Southwest have tried to manipulate the supply side by cutting the number of flights they offer so that they can charge more per ticket.  Thus, revenue per unit has increased while the raw number of passengers has declined.  Another factor that has helped airlines in this economy has been the drop of oil prices.  While it may seem like airlines have hit bottom, and that when the economy turns around there will be more business and leisure travelers, one must not forget that when the economy turns around, oil prices will increase as well.

So, with cutthroat competition and a never-ending cycle of high oil prices mixed with high demand followed by low oil prices mixed with low demand, it truly seems like there is not much hope for any company in the airline industry, including Southwest Airlines. 

Southwest Airlines, mired by macroeconomic problems and aggressive competition within in its own industry, just does not have the potential to be profitable enough for me to suggest buying it.  There are too many companies out there that will rebound much faster than Southwest Airlines when the economy turns around.  Those are the companies that we should be buying now.

 

-Niki Pezeshki

College Trillionaire

Market Recap - January 8, 2009

Stocks ended mixed on Thursday as the Dow Jones finished down 27.24 points (-.3%) and the S&P 500 edged slightly higher 3.08 points (+.3%). 

The morning got off to a bad start, as the Dow sank 118 points in early trading, due to the release of December results by many retailers.  Wal-Mart’s (WMT) numbers were particularly bleak, as the retail powerhouse said that its December same-store sales were worse than Wall Street expected and lowered its 4^th quarter earnings expectations.  Target (TGT) and Costco (COST) also announced that same-store sales fell about 4% in December. 

But, as the day wore on, Citigroup (C) announced that it had reached an agreement with lawmakers on a plan that would allow bankruptcy judges to alter home loans in order to prevent foreclosures.  This plan, which would be attached to Obama’s stimulus package, could potentially ease the foreclosure crisis that has been one of the biggest catalysts for the recession that we are currently experiencing.  The announcement of this proposed deal led to an upswing in the market, as investors became hopeful that an end to the foreclosure crisis would bring our economy back to stability and prosperity.

Another source of optimism for investors in afternoon trading came from Obama’s announcement of some of the major details in his economic stimulus plan.  His so-called “American Recovery and Reinvestment Plan” (ARRP), which will cost about $775 billion, will provide a $1,000 tax cut to 95% of working families and will create many new jobs across the country. 

Bad news looms, though, with December unemployment figures set to come out tomorrow.  Economists expect the numbers to show a decline of 545,000 jobs in December, but the number could potentially be much worse.

If the number is worse that 545,000 and the market still goes up, that is a sign that most investors are over the bad news and have a positive outlook on the economy.  If the number is worse than 545,000 and that market gets crushed, it will prove that most investors are still wary about the state of the economy.

 

Niki Pezeshki

College Trillionaire

Market Recap - January 7, 2009

The markets took a dive today as the Dow Jones Industrial lost 245 points (-2.72%) and the S&P 500 lost 28 points (-3%). The ebbing and waning of Wall Street appears to be the result of battles between the bad news given by major businesses and optimistic reports of Obama’s stimulus package. It appears that today the bad news outweighed the good.

The bad news came from multiple sectors today. Intel lowered its revenue expectations for the 4^th quarter by $500 million. The scariest part of this news is that the drop in sales cannot be attributed to a failure of the company. This means that the economy is simply to blame.

Major aluminum producer Alcoa reported that its will be reducing output and its workforce in the coming year. Time Warner added to the pessimism, after it estimated a 4^th quarter loss.

As if all this wasn’t enough, the ADP National Employment Report came out today. The report that precedes the government’s unemployment statistic estimated that we lost 693,000 private sector jobs in December. The government’s unemployment report will be released on Friday.

Don’t expect the dreary news to end any time soon. But, do expect national optimism to increase as president-elect Barack Obama’s inauguration day gets closer (Jan 20^th). While the bad may have won the fight today, tomorrow is a new day.

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 7, 2009

P/E Ratio

The P/E ratio is one the single important numbers that investors use to judge the value of company's stock price. The number is actually quite simple: it is the Price of the stock divided by EPS.

Let me use NICE-Systems Limited (NICE), a technology company, as an example that shows how P/E can be used to judge a stock's value. NICE is currently trading at about 23.30 and its EPS is .47. The P/E = (23.30) / (.47). So P/E= 49.89.

A large P/E ratio can be interpreted to mean that the company is highly valued by its shareholders. Think about it logically. A company reports a low earnings per share when compared to the price of a stock. Therefore, the buyers of stock are paying a higher price because they believe the company is worth more. But be forewarned, a high P/E does not mean that you should buy stock in a company. It may, in fact, indicate the opposite!

You have to judge what you think the value of a company is versus what other people think the value is (measured by the P/E). To give you some perspective, the P/E of 49.89 that NICE currently holds is high. If read more about the company, you’ll know that it has recently expanded its business internationally and is steadily growing. Therefore, we might assume that investors appreciate this growth and are paying for it in the stock price. But should you buy the stock? A P/E of 49.89 is very high, and this indicates that investors value the company very highly. So for NICE to be a profitable buy, the value of the company must be EVEN HIGHER than those investors think. The odds of this are less likely with a stock that already has a high P/E ratio.

On the other hand, if you highly value a company, but the P/E ratio is low, you would take this as a very strong sign to buy. This would indicate that the company is undervalued by investors and, if you’re right in your judgment, that it should do well in the future.

Having a good understanding of the Price/EPS ratio and applying it to your analysis of companies will greatly help your chances at making big profits in the stock market.

Stock of the Day - January 7, 2009

Chipotle Mexican Grill

Chipotle Mexican Grill (CMG) operates fast-casual restaurants, serving fresh Mexican food that many of you eat regularly and love.  As of September 30, 2008, Chipotle operated 797 locations in the United States and 1 location in Canada. 

The chart of Chipotle’s stock price looks like a giant and steep mountain.  The company, which started being publicly traded at $44 per share in January 2006, reached its all-time high of $152.36 in December 2007.  Since its high, the company’s stock price has steadily declined to its current price of $58.10.  The question now is, does the fact that the company is trading at almost one-third of its high indicate that it is cheap and should be bought?

The case for buying Chipotle lies in the story of the company’s growth.  The number of Chipotle restaurants increased at a 26% annual rate between 2002 and 2006.  In 2007, the company opened 125 more stores, translating into a 22% growth rate.  Just this past year in 2008, the Mexican-food chain opened between 130-140 more restaurants, and it opened its first restaurant in Canada.  The company plans to continue its aggressive expansion in the United States in 2009, but it has also stated that it will build more stores in Canada.  But, just recently, Chipotle released a statement showing a keen interest in expanding into London in the near future.  With a high level of growth in the United States and new channels of growth from both Canada and Europe, this company will continue to expand. 

Not only is Chipotle growing the number of stores it operates, but it is also growing the sales at existing restaurants.  During the 2003-2007 period, average restaurant sales increased at an 8.1% annual rate.  This means that every year, each Chipotle restaurant saw 8.1% more customers coming through its stores than the previous year. 

The case against Chipotle stems mostly from macroeconomic concerns and from higher food costs.  Chipotle is famous for serving fresh food and high quality products.  While this strategy of serving quality food attracts many customers, it comes with a steep price.  Prices for organic beef, chicken and pork have risen sharply in the past year, and this increase in food costs will hurt the restaurant’s profit margins.  In terms of macroeconomic effects on Chipotle, it has been very hard for the company to keep sales growing at a high rate when it is competing with fast-food companies such as Taco Bell and McDonalds.  People just do not have the money to regularly spend $7-$8 on a burrito when they could be eating one for $0.89 from Taco Bell.

I would rate Yum Brands (YUM), the company that owns and runs Taco Bell, Pizza Hut, and Kentucky Fried Chicken, as a much better investment than Chipotle.  YUM is aggressively expanding into China and is doing extremely well so far.  In addition, with the economy being the way it is, a company like YUM that sells cheaper products than Chipotle just seems more logical. 

So, while a burrito from Chipotle might taste better to you than an 89-cent burrito from Taco Bell, the better investment for now is definitely Yum Brands. 

 

Niki Pezeshki

College Trillionaire

Stock of the Day - January 6, 2009

Should you be shouting Yahoo!?

Are you feeling lucky? This is the main question you should ask yourself if you’re considering purchasing shares in Yahoo (YHOO).  I think the entire basis for success of this stock (in the short-term) is completely event driven.  Investors of Yahoo are looking for a merger with Microsoft that might come close to doubling the stock price. But hope for a merger is the only hope that you should have for this company.

My outlook for the company, merger aside, is grim for several reasons: (1) Major leadership problems, (2) Rapidly diminishing income, and (3) Basic lack of innovative products.

(1)Yahoo is in the middle of a search for a new CEO. The company isn’t going to fix its many problems until it has a new leader and the search for a new CEO may not end until the end of the first quarter, or longer. The company has been inefficient and unproductive for the past four years, and the lack of leadership is the core of the problem.

(2) If you want more scary news just take a look at Yahoo’s income statement (which, ironically, you can conveniently locate by going to their own finance website). Yahoo generated $1.1 billion in income in 2005, $941 million in ’06, and $695 million in ’07. Their quarterly numbers for ’08 have continued this steady downward trend. On the bright side, though, the company is sitting on $3.2 billion in cash.

(3) The lack of income can be attributed to a lack of innovation. Yahoo has been doing the same thing for a long time… and it’s boring. Google is absolutely dominating Yahoo in terms of search usage (64.1% of online searches compared to Yahoo’s 16.1%). Arguably the website’s most useful function, Yahoo Finance has tools that are very useful and widely implemented. The website needs something new and interesting to renew the interest of internet surfers and bring them back to Yahoo and away from Google.

The economic crisis we’re facing has been no help for the technology sector, and this does not exclude Yahoo.  Retailers are hurting badly and have less money to spend on advertising. This converts to smaller revenues for internet search companies that require advertising for the vast majority of their income.

But even knowing all this, Yahoo might still be a profitable purchase right now… if Microsoft decides to buy it out. So, we need to figure out if they actually will make the merger, and when it will happen. Back in January of 2008, Microsoft offered Yahoo $31 a share when the stock was trading at around $19. After about 3 months of negotiations, Microsoft pulled its offer off the table. Rumors of the deal happening have been circulating around ever since.

So, pardon me while I hop into the ring of speculation. I don’t think there is any way we’ll see a bid from Microsoft until Yahoo puts a new CEO in charge.  I’d put the odds of the deal between the two companies happening at 4 to 1.  If it happens, I believe it will happen in the second quarter of 2009 (when I think the new CEO will step in), but by then it is anyone’s guess at what price Yahoo shares will be trading at. Even still, you could collect some cash if you’re willing to make a bet on the deal going through. So again, I ask you: Are you feeling lucky?

That’s all I’ve got for now, and besides, I’m late for my Gambler’s Anonymous meeting.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 6, 2009

Earnings per Share

A company’s Earnings per Share (EPS) is the amount of income a company makes per share outstanding.  EPS serves as an indicator of a company’s profitability.  To find EPS, you have to divide the company’s profit by the number of shares outstanding.

Profit/Income

---

Total Shares

EPS is widely considered to be one of the most important variables in determining a company’s share price and ultimate true value.  A company with a higher EPS makes more profit per share outstanding than another company with a lower EPS. 

For example, a company that has a net income of $1 billion and has 500 million shares available to the public will have an EPS of 2.  This simply means that the company makes $2 for every share that it makes available to the pubic.  It seems logical, then, that if company A had an EPS of 3 and company B had an EPS of 1, if all other factors were held equal, that company A would be the more profitable company, and probably the better investment. 

Another important factor to look at when analyzing a company’s EPS is the historical EPS growth.  If a company’s EPS has been growing at a solid rate of 20% for the past 5 years, it would definitely be considered a fast-growing company, and it might be an even better investment than a competing company that has a slightly higher EPS but a much lower historical EPS growth rate. 

Tomorrow, we will discuss an extremely important ration called the P/E ratio.  The P/E ratio is a great complement to EPS, and it will allow you to judge a company’s value even better.

Market Recap - January 6, 2009

The S&P 500 ended the day on Tuesday at its highest level in 2 months, as the index ended at 934.70, up 0.78% for the day.  The Dow Jones industrial average ended with a gain of 62.21 (+.69%) as well. 

The market continued its ascent even as more bad news circulated about the economy.  Pending homes sales, a statistic that measure how many homes are in the process of being sold, fell to its lowest level ever.

Yet, investors are still more optimistic than they were only a couple of weeks ago, as they continue to brush off bad news and maintain a positive outlook for 2009.  Another indicator of increased optimism comes from the types of stocks that investors are buying.  Investors have begun to move out of sectors like consumer staples and health care, known for being safe recession plays, and they have begun investing in more risky sectors such as financial companies, consumer discretionary stocks, and technology shares. 

Even with the increased optimism, it is clear that investors are still unsure about what to expect for 2009.  There are still too many questions out there and even the most respected names on Wall Street cannot make firm and absolute predictions about what 2009 will bring for the stock market and the economy. 

After the markets closed on Tuesday, Alcoa (AA), the world’s third-largest aluminum maker, announced that it will cut 13,500 employees worldwide and that it will cut spending as a result of the global economic slowdown. This is not good news for both the aluminum company and for the world economy, and there is a good chance that the markets will feel the impact from this news tomorrow.

Niki Pezeshki

College Trillionaire

 

Stock of the Day - January 5, 2009

Motorola, Inc.

Motorola, Inc. (MOT) provides wireless and networking equipment for cable and telecom service providers.  The company, which is considered to be in the communications equipment industry, makes mobile phones, Bluetooth devices, cellular infrastructure systems, and many other products made to enhance mobile communication.

As with any company in this recession that sells relatively expensive products to end-consumers, Motorola has been hurt by slower sales.  But, Motorola hasn’t just been hurt - it has been crushed.  The company has been losing market share to its competitors, it has been losing more money than it has been making for over a year, and its stock price has been absolutely massacred as a result.  The stock price is currently at $4.48, down around 70% from its 52-week high of $15.25. 

Motorola’s global handset market share used to be 22% in 2006.  That means that Motorola made 22% of all cell phones used in the world in 2006.  In 2007 and 2008, it is estimated that Motorola’s global handset market share fell to 13% and 8.5%, respectively.  That is the exact opposite of growth, and it spells trouble for anyone looking for a company that has future potential.  What can be attributed to Motorola’s steep decline in market share? Think about all of the amazing smart phones that have come to the market in the past few years.  Nokia has made very nice smart phones that are extremely popular in Asia and Europe.  The Blackberry Curve, Bold, and Storm have also been extremely popular and look to become even more prevalent as the rest of the world tries them out.  And last but not least, Apple’s iphone has been a monster that will continue to grow at a very fast pace across the globe. 

Now think about all of the great phones Motorola has come out with recently. Hmmmm. I can’t even think of one… and that is exactly the problem!  Motorola has not shown many signs of life in terms of keeping up with its competitors, and if the company does not come up with a desirable phone soon, their current 8.5% market share could plummet even further.

Not only has Motorola been losing market share, but it has also been operating in the red, meaning that the company has been losing money instead of making money.  Ever since the first quarter of 2007, Motorola’s quarterly earnings per share have been either negative or barely positive.  It is getting worse too, as the company’s EPS for the 3^rd quarter of 2008 was -$0.18, and its net income dropped 761.7% from one year ago to  -$397 million. 

The company is clearly shrinking at a scary rate, and it makes you wonder what is keeping it from going bankrupt.  The factor that is keeping Motorola afloat is the company’s balance sheet, as it is sitting on a load of cash and very little debt.  At the rate that Motorola is spending money and with the company’s debt obligations, it can last safely into 2012.

So, while the company probably will not go bankrupt, I really do not see any reasons to expect much growth.  It is getting crushed by its competitors, and Apple, Rimm (blackberry makers), and Nokia, are making great phones and are expending at blazing speeds.  If you have a hunch that Motorola will invent a great phone in the near future, or you have some reason to believe that it has some trick up its sleeve, go ahead and do some more research to see if you should invest in it.

Personally, I do not see any factors that will impact the company’s positive growth any time in the near future, and I think that its stock price will hover in the low-to-mid single digits for a while.  This company bores me, and it will bore you if you have it in your stock portfolio.

Niki Pezeshki

College Trillionaire

Trillionaire Term of the Day - January 5, 2009

Market Capitalization (Market Cap)

Market Cap is the measurement by which we classify a company’s size and value.  We calculate a company’s market cap by multiplying the stock price by the number of shares outstanding.  For example, General Electric (GE) has a stock price of 15.67 and has 9.96 billion shares outstanding.  When these two numbers are multiplied you are left with GE’s market cap, which is 155.9 billion. 

A common misconception is to believe that when comparing two companies, the company with a higher stock price is the larger company.  This is wrong, as the way to find out which company is larger is to compare their market caps.

There are three different sub-groups of market caps: Large cap, mid cap, and small cap.  Large cap companies range from $10 billion and up, and these are mostly very well known companies such as Wal-Mart (WMT), Yahoo (YHOO), and Exxon (XOM).  Mid cap companies range from $2 billion to $10 billion in market capitalization.  These companies are considered to be more volatile than large caps, but they have more room for growth.  Small cap companies, which are relatively young, have market caps ranging from $300 million to $2 billion.  The companies that fall into the small cap range have the most risk, but they have the most room for growth.  These ranges for market cap are not set in stone, but they are good guidelines.

Conclusion:  Knowing a company’s market cap greatly influences the way in which many investors choose their stocks.  Investors looking for stability will look harder at large cap stocks, while investors looking for higher growth and willing to tolerate more risk and volatility will probably invest more in mid cap and small cap stocks.

Market Recap for January 5, 2009

Hope for last week’s rally to continue into the first full week of the New Year were doused when the Dow closed down 81.8 points (.91%). The two big stories of the day were the release of U.S. automaker car sales and Obama’s talks with congressional leaders.

Almost exactly on line with analysts’ estimates, US auto sales fell an appalling 36% in December. Despite the bad news GM was up 1.64% Ford gained 4.88% on the day. The poor numbers left many people to question the effectiveness of the rebates and near-zero percent interest rates that were given towards the end of 2008. The customer-enticing financing was made possible by government handouts given at the end of last year.

President Elect Barack Obama advocated for his stimulus package and other matters today in Washington. Obama spoke with both Democratic and Republican congressional leaders regarding his proposed American Recovery and Reinvestment Plan as well as interesting new plans for 300 billion in tax cuts.

The downward movement on today’s markets suggests that investors are still hesitant despite the news of the stimulus package and tax cuts. Expect some more bad news from unemployment figures and quarterly reports later this week. Not to depress you or anything.

 

-Matt Schwartz

College Trillionaire