Stock of the Day - January 31, 2009 - NFLX

Netflix (NFLX)

Netflix (NFLX) has revolutionized the way that people watch and rent movies, and the online movie rental provider has been gaining popularity every single year since its inception in 1999. CEO Reed Hastings has been lauded for creating and running a company that provides an innovative service with a successful business model. Netflix is interesting because, while the company is doing everything right, it should only be judged by the way that Wall Street is currently treating its stock price. Follow me through my analysis of the company and my consequent reasoning for not labeling it a buy.

Netflix’s business process is actually pretty simple: Go online, create a queue of movies that you want to watch, they mail you the movies, and when you’re done viewing your movies, you mail them back with prepaid postage. The biggest difference between Netflix and competitors like Blockbuster (BBI) is the fixed rate of rent. Netflix charges a fixed monthly rate that stays the same regardless of how many movies you choose to see per month, and this translates into no late fees. Blockbuster, on the other hand, charges variably with each movie that you rent (with late fees).

It turns out that Netflix’s process has become the ideal form of affordable entertainment. The average user picks the  $17/month package that gives them 3 DVD’s at a time. This means that for $17 dollars, a Netflix customer can watch anywhere from 3 to about 20 movies a month when you consider the time it takes for mailing. By watching only the minimum number of movies per month (3), Netflix member end up paying a little more than $5 a movie, but with more movies, members could watch at a rate of $1 a movie. It is clear that Netflix provides an affordable service when you compare it to its biggest competitor, as Blockbuster charges about $7 for an in-store movie rental. To cap it off, Netflix has recently added 12,000 streaming movies online that can be watched at any time on its website, advertisement free. This service comes free with any regular subscription to Netflix. The cheap entertainment has been a recipe for success in these recessionary times, and people are subscribing to Netflix instead of going to movie theaters and theme parks.

Based on the merits of the company alone, Netflix seems like the perfect company to buy. But, it would be foolish not to analyze how Wall Street has been treating the company. Netflix last traded at $36.15, and the stock has a 52-week range of  $17.90 – $40.90. Incredibly, the stock was selling at its low of about $18 less than four months ago. Since then, the stock has doubled in price! Everyone is hopping on the Netflix bandwagon and, although it pains me to say it, if you haven’t bought it by now, it’s too late. The company has a PEG (5 yr expected) of 1.61, a statistic that tells me that the company is currently overvalued (Check out the Trillionaire Term of the Day on PEG Ratios - 1/30/09).

Now here’s the part where Netflix’s stock gets even more interesting. 27.9% of available Netflix shares are being shorted right now! The absolutely gigantic number of shares being sold short means that there is another bandwagon of people that believe too many people have jumped on the original bandwagon! If I haven’t completely confused you yet, these short sellers believe that investors overbought the stock and are betting that the price will fall very soon. To add to the complication, the large amount of short sellers may cause what is known as a “short squeeze.” This phenomenon can cause stock prices to skyrocket, because if people short selling the stock choose to bail out, they will be forced to buy the stock back in large numbers.

So, there are two possibilities for Netflix right now. A: the stock drops dramatically in price and the short sellers are correct in believing that the stock is overvalued. Or B: the stock continues to rise and we witness a short squeeze that drives the stock dramatically upward. I think that it is too much of a risk to bet on either one of these options, so I would not recommend buying the stock right now. The company has very solid fundamentals and provides a great service, so if it ever drops into the low-to-mid twenties, I would recommend a buy.  For current owners of Netflix, I believe that selling the stock and taking a gain would be your best option. Regardless, Netflix provides a perfect example of the unlimited possibilities and options that the stock market can create.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 30, 2009 - PEG Ratio

Price/Earnings to Growth (PEG) Ratio

The PEG ratio is a ratio used to determine a stock’s value while taking into account earnings growth.  The PEG ratio is actually the more in-depth and telling version of the P/E ratio, as it compares a company’s P/E ratio to its projected earnings growth (to learn about P/E ratios, see the Trillionaire Term of the Day for January 7^th, 2009).  The calculation to find the PEG ratio is:

Price/Earnings Ratio

--------------------------

Annual EPS Growth 

The PEG ratio takes into account the fact that a company with a higher P/E ratio is usually growing at a faster pace, and it shows that companies with high P/E ratios are not always overvalued.  So, the PEG ratio is a much better method of comparing companies with different growth rates.  According to Peter Lynch, a very famous investor, “The P/E ratio of any company that’s fairly priced will equal its growth rate.” This quote essentially says that a fairly valued company will have a PEG ratio of 1.  For example, if a company has a P/E ratio of 15 and is growing its earnings at a 15% rate, this company would be fairly valued because its PEG ratio would be 1. 

Another conclusion we can make from this equation is that a lower PEG ratio is better/cheaper and a higher ratio is worse/expensive.  For example, a company with a P/E ratio of 10 that is growing its earnings at a 20% rate will have a PEG ratio of .5.  This PEG ratio of .5 is basically saying that the company’s earnings are growing two times faster than people are giving it credit for.  On the other hand, if a company had a P/E ratio of 30 and was growing its earnings at a 15% rate, the company’s PEG ratio would be 2.  This company would be considered overvalued and expensive, as investors are paying 30 times earnings, while earnings are growing only at a 15% rate. 

Let’s do a real-world example, and let’s compare two internet companies, Yahoo (YHOO) and Google (GOOG).    Yahoo currently has a 38.71 P/E ratio, meaning that investors are paying 38.71 times the company’s earnings for the stock.  But the company is only expected to grow earnings around 18.25% in the next five years.  Thus, the PEG (5 yr) ratio for Yahoo is 2.12 (38.71/18.25).  Google currently has a 25.43 P/E ratio, and the company is expected to grow earnings around 29% over the next five years.  Thus, the PEG (5 yr) ratio for Google is .88 (25.43/29).  So what do these numbers tell us about both Yahoo and Google? First, just by looking at the P/E ratios, we can tell that Yahoo is more overvalued than Google, as its P/E ratio is 38.71 compared to Google’s 25.43.  But, is Yahoo’s higher P/E ratio justified by a higher growth rate.  The answer is no, as Google is expected to grow its earnings 29% over the next five years, and Yahoo is only expected to grow 18.25%.  So, it seems that Yahoo is definitely more overvalued and expensive than Google is, based on both of the companies’ earnings growth expectations and current P/E ratios.  The PEG ratios tell the story, as Google’s is an affordable .88 and Yahoo’s is an expensive 2.12. 

The biggest problem with PEG ratios is the fact that the EPS growth rates are assumptions, and the growth rates might not pan out the way analysts expect them to.  For example, how about if Google doesn’t grow 29% in the next 5 years, but only grows 10% due to some external factors.  Then, the PEG ratio would be totally different, and Google might not be as cheap as it looks. 

Knowing and understanding PEG ratios is crucial for all investors who want to find companies that are undervalued and avoid companies that are overvalued.  Do not judge the P/E ratio on first glance, but instead understand why a P/E ratio is high or low.  Is a company expected to grow at a high rate in the future? And, if so, have investors already factored this expected growth into the stock price? PEG ratios are extremely important, and I hope that you will use them to find great deals on the market. 

 

Niki Pezeshki

College Trillionaire

Market Recap - January 30, 2009

The stock market fell again on the last trading day of January, as a flurry of bad economic, political, and corporate news continued to scare investors.  The Dow Jones Industrial Average finished down 148.15 points (-1.82%) and the S&P 500 slumped 19.26 points (-2.28%).

One reason for the drop in the markets was due to the 4^th quarter Gross Domestic Product report.  The Commerce Department reported a 3.8% fall in GDP for the 4^th quarter of 2008.  This was the worst GDP output since the first quarter of 1982, and it was the first time since 1991 that the United States has experienced two consecutive quarters of declining GDP.  Many economists are also predicting that the 1^st quarter of 2009 will be even worse than the 4^th quarter of 2008, a prediction that is scary to many investors.

In politics, the Obama administration’s “bad bank” plan, which would help banks by buying their troubled assets, is experiencing delays.  The news that the plan is moving slower than first expected sent financial stocks lower today and greatly decreased investor confidence in the financial sector.

Many companies also announced more layoffs and predicted a bleak forecast for the near future.  Morgan Stanley (MS) and Goldman Sachs (GS) are both considering laying off a big chunk of their employees.  Honda (HMC) slashed its 2009 profit targets by more than 50% as its earnings fell over 90% in the 4^th quarter of 2008.  Even Proctor & Gamble (PG), which is a consumer staple company that sells household products such as toothpaste and laundry detergent, reported a 3% decline in sales for the 4^th quarter of 2008.  The company, which is usually unaffected by economic downturns due to its essential consumer products, lowered its earnings projections for 2009.

This past week was marked again by extreme volatility as a result of both good and bad political news, economic reports, and corporate earnings announcements. Next week should be just as volatile, as investors try to gauge where our economy is headed and how quickly Obama’s plans will be put into place.  The $819 billion stimulus plan will be voted on in the Senate next week, and the outcome of the Senate’s vote will definitely make a huge impact on the markets. 

Have a great weekend.

 

Niki Pezeshki

College Trillionaire

Stock of the Day - January 29, 2009 - WX

Wuxi PharmaTech Inc. (WX)

Wuxi PharmaTech (WX) operates as a pharmaceutical, biotechnology, and medical device research and development outsourcing company in both China and the United States.  The company performs outsourced pharmaceutical research for healthcare giants such as Eli Lilly (LLY), Merck (MRK), and Pfizer (PFE).

Wuxi’s stock price was absolutely crushed in 2008, and it is currently trading at $5.80 per share.  The 52-week range has been as low as $3.89 and as high as $27.90, and the company traded as high as $41.28 per share in October 2007.  Wuxi is a small-cap company ($380.64 market cap), which makes it more risky than the average company to invest in.  But, because it is an international small cap stock, there are fewer analysts covering the company.  I believe that it is a very strong company with a ton of potential, and I love the fact that it is still slightly obscure and out of the public’s eye, as it gives us a chance to buy it low.  

There are many reasons I think investing in Wuxi PharmaTech would be a wise decision.  The first intriguing aspect of Wuxi is the company’s continued growth through acquisitions and contracts.  Early in 2008, Wuxi agreed to buy AppTec Laboratory Services, another research and development services provider, for about $151 million.  This deal with AppTec will boost Wuxi’s per-share earnings and will greatly increase the company’s revenue stream, as AppTec is expected to bring in over $70 million per year.  In November 2008, Wuxi also inked a contract with pharmaceutical giant Pfizer.  As a result of the deal, Wuxi will conduct tests on Pfizer’s drug candidates, and it will create tests that will help Pfizer learn about the properties of the drugs it is making.   

But, Pfizer is definitely not Wuxi’s only influential client, as the company works with AstraZeneca (AZN), Amgen (AMGN), Bristol Myers Squibb (BMY), Genentech (DNA) and several other huge pharmaceutical companies.  With such a solid foundation of companies that Wuxi works with, it is clearly a huge player in the global drug research market.  Wuxi also works with many big-name Chinese pharmaceutical companies, conducting drug research for them as well.

But, while the deal making and partnerships will definitely help Wuxi grow and stay relevant for a very long time, I believe that the biggest upside for this company comes from external factors, such as the weakening global economy, and the current recession in the United States.  There is no doubt that American pharmaceutical companies are feeling the affects of the economy.  Just recently, Pfizer slashed 800 research and development (R&D) positions, and cut around 2,400 sales positions.  Pharmaceutical R&D is undoubtedly a very expensive aspect of business for drug companies.  Having said this, drug companies must continue to pay for R&D if they want to produce new drugs that will bring them profits.  So, as they are trying to cut costs but still make new and unique products, a logical place to look for help is China.  There is no better place to get high quality scientists and productive R&D people for cheap than in China.  As the economy gets worse and American pharmaceutical companies continue to look for ways to cut costs, they will start looking to outsource more and more R&D projects to China.  A company like Wuxi, which has so many giant pharmaceutical companies locked in as partners, will definitely reap the benefits of this fundamental shift in R&D outsourcing as the American economy continues to weaken and drug companies continue looking for ways to cut costs. 

For a company whose P/E ratio usually hovers around 30, and for a company that is expected to increase earnings by about 25% every year for the next five years, Wuxi seems like a steal at under $6 per share and with a current P/E ratio of around 11.  There are obviously many risks that come with investing in a relatively unknown small-cap Chinese R&D company that has only been publicly traded since 2007, but I hope that I have convinced you that now is the time to buy shares in Wuxi PharmaTech.

Finding hidden gems,

 

Niki Pezeshki

College Trillionaire

Market Recap - January 29, 2009

An abundant amount of bad news today caused an abrupt halt to the three-day winning streak of the Dow Jones Industrial Average and the four-day increase of the S&P 500. Poor reports on unemployment claims, home sales, and earnings forced the Dow to fall 226.44 (-2.7%) and set the S&P back 28.95 points (-3.31%) to 845.14.

Two records were broken today, and they were very bad records to break. The total number of people receiving unemployment hit a record high at 4.78 million for the week ending on January 17. The Associated Press has estimated that almost 130,000 jobs have been lost so far in January.

It’s no surprise that there is a correlation between the massive amount of layoffs in recent months and a drop in home sales. December home sales dropped 14.7% to an adjusted annual rate of 330,000 home sales per year, a record low.

If breaking the records for two key indicators of economic frailty scared investors away, the addition of horrible reports from major companies terrified them. Starbucks announced that they will be cutting 7,000 jobs, Kodak will lay off 3,500 to 4,500 workers, and Allstate will release 1,000 employees. Starbucks’ earnings fell by two-thirds, Kodak posted a $137 million fourth quarter loss, and Allstate reported a $1.13 billion dollar loss in the fourth quarter. Ford lost $5.9 billion in the last quarter of 2008, bringing the car company’s total losses for the year to a record $14.6 billion.

There were some glimmers of good news amongst the bad. Amazon reported that its fourth quarter profit increased by 9%. The online retail giant even claimed that its last holiday season was its “best ever.” Amazon gained 13% in after-hours trading.

Until Tomorrow,

 

Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 29, 2009 - Bulls and Bears

Bulls and Bears

If you’ve ever turned on CNBC or opened the Wall Street Journal you’ve heard analysts talk incessantly about bulls and bears. And, you probably questioned the sanity of people who relate animals to the stock market. But, bulls and bears are actually a simple part of everyday Wall Street lingo.

Bulls are investors that are optimistic about a certain stock, a market, or a general economic trend. They aggressively believe that a stock will rise or a market is on the way up, so they tend to buy on their beliefs. If I say that I am bullish on a stock, I mean that I believe the stock will increase in price in the future.

Bears, on the other hand, are pessimistic about a stock or the markets. They believe that trouble is looming around the bend, and that one ought to stay away from the danger. If someone is bearish on a stock, they’ll tend to sell, avoid buying it, or even short sell the stock (Check out our Trillionaire Term of the Day on Short Selling).

The terminology can also be applied to the entire stock market. For example, you’ve probably heard many investors saying that we are currently in a bear market. A bear market is usually characterized by recessionary economic trends, fearful investors, and falling stock prices. A bull market is the exact opposite: in a bull market you should expect expansion of the economy, aggressive investors, and rising stock prices. Famed hedge fund manager and Mad Money host Jim Cramer loves to say, “there is always a Bull Market somewhere.” By this he means that there will always be a group of stocks, currencies, or commodities that are on the rise.

Why bulls and bears? Although the true origin of their use has been lost in investor lore, people have come up with some clever guesses. One theory is that the term bear is based on ‘bearskin jobbers’ who sold bearskins before they received them, in hopes that the price would decrease and they would make a profit. So in a sense, they were the first short sellers. Another guess refers to the ways that the two animals attack their prey. Bulls aggressively charge and thrust their horns upwards, hence the aggressive nature of investors and the upward swing in the markets. Bears attack by downwardly swiping with their paws like the downward direction of a bear market.

Regardless of the true source of the terminology, it’s of the utmost importance for you to understand what people mean when they talk about bulls and bears. At the very least, you’ll gain appreciation for how investors are thinking. And now you can add a dash of flavor to your financial vocabulary. Enjoy

 

-Matt Schwartz

College Trillionaire

Stock of the Day - January 28, 2009 - DIS

Walt Disney Company (DIS)

Walt Disney has been a household name for over 75 years. Disney’s movies, characters, and products have a place in every young person’s heart. The years have seen one man’s dream turn from short animated films to an internationally recognized company. The Walt Disney Company (DIS) is an incredibly diverse company with branches that span multiple sectors. The best way to analyze the company is to go through each one of these branches.

Disney’s parks and resorts are a hefty portion of the companies business, as they provide about 30% of the companies revenue. There are five resort locations that make for a total of 11 theme parks, including the famous Disneyland Resort in California and Walt Disney World Resort in Florida. Disney also has its own Disney Cruise Line and international Vacation Club. Disney increased its operating income from parks and resorts in 2008, but at a slower rate than it had been increasing in prior years. We have to ask ourselves if we believe that parks and resorts can continue their success in the harsh economic times that we’re living in, as people are cutting back on spending and vacations. Disney recently offered buyouts on the positions of 600 executives in this branch of their business. This attempt to cut spending may signal reduced forecasts for income in 2009. I simply do not believe that the resorts and parks of Disney will help the company this year.

Disney’s biggest source of income comes from its media networks. Of course, Disney owns the multiple Disney channels on TV, but it also own ABC and ESPN. These guys have consistently netted Disney solid amounts of cash for less invested capital over the years. Operating income received from the media networks amounted to about 56% of Disney’s total income for 2008.  Disney channel, ABC, and ESPN are all nationally televised. Disney’s media networks should continue to succeed and bring in good money in 2009, and this is very significant when you consider that this branch is a large part of the company.

Disney will forever be famous for instilling magic into the lives of children and adults alike in the form of its movies. Studio entertainment accounted for about 19% of Disney’s revenue for 2008. Blockbusters like Wall-E and High School Musical proved that the entertainment giant can still captivate any audience. Despite the success, entertainment in the form of movies is hardly recession proof. Viewers will come to the big screen much less, and DVD sales will definitely drop in the near future.

Finally, Disney has proven itself time and time again to be a force in merchandising. No one else sells to children better. But, sales of consumer products are the company’s smallest source of income: Consumer products provided only 8.5% of Disney’s income in 2008. The sale of their products will not boom in 2009, but there will still be a demand for the toys, clothing, and countless other desirables that Disney makes.

The company was trading at around $32 before the disaster that hit us in late 2008 and was last traded at $22.28. Is there merit behind the $10 drop in price? If we look at this strictly based on the numbers, the $10 is about a one-third decrease in stock price. Has Disney lost one-third of its value as a company? Lets look at my branch analysis: Parks and Resorts will be down (22% of ’08 income), Media Networks will continue to succeed (56% of ‘08 income), Studio Entertainment will be weaker (13% of ’08 income), and finally merchandising may slightly drop (8.5% of ’08 income).  If I were forced to put a range on the decrease in the company's actual value, I would roughly estimate somewhere between 20 and 30 percent. So it looks like Wall Street slightly oversold DIS.

Disney is an entertainment titan that will be around for a long time to come. I would add the company onto a growing list of blue chip stocks that are currently undervalued but will continue to succeed in the long run. While the short run is murky and unsure, DIS will eventually reach its mid-$30 levels again. There are many companies that will rebound much faster and steeper than Disney when the markets turn around, but on its merits alone I would rate Walt Disney Company a very conservative buy.

 

-Matt Schwartz

College Trillionaire

Market Recap - January 28, 2009

Financial stocks pushed Wall Street significantly higher today, as the Dow Jones rose 200.72 points (2.46%) and the S&P 500 surged 28.38 points (3.36%).  Financial stocks shot up, as investors hope that the Obama administration will create banks to absorb the bad assets weighing down the financial system.  Basically, the government has preliminary plans that will take bad debt and troubled mortgages from banks, and it will place these toxic assets in a “bad bank” that is run by the government.  This move by the government will allow private banks to begin lending normally again, as they will no longer have to worry about their messed up balance sheets.  This news about government “bad banks” is still very preliminary, but even the premature news greatly influenced bank stocks today. 

The Federal Reserve also made a statement today, as it claimed that it will use “all available tools” to fix our economy.  The Fed held the benchmark Federal funds rate at 0%, and restated that it will keep the rates this low for a while. 

This news does not take away the fact that we will not be seeing any great economic news or trends anytime soon, so any good news that comes from Washington will have a big impact on investor confidence. 

Barack Obama is making moves, and making them fast, as the $819 billion stimulus bill that he has been pushing recently was passed today in the House of Representatives after the markets closed.  The bill, which is filled with new spending and tax cuts, will now move to the Senate.  I don’t know if it will be passed in the Senate as soon as it was in the House, but it is great to see the government is actually making things happen under Obama.  We will describe the details of the bill more in tomorrow’s Market Recap, but I expect the markets to react favorably tomorrow to the news that the bill passed through the House.

Here is an article to describe the bill and the next step in the process of passing it: http://finance.yahoo.com/news/House-passes-economic-apf-14188638.html

 

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

Trillionaire Term of the Day - January 27, 2009 - IPO's

Initial Public Offering (IPO)

Have you ever wondered why you can trade shares of Apple (AAPL)? Do you know why you have the right to buy a portion of Verizon (VZ)? How did these companies, and many others, come to be traded on public stock exchanges? You can answer all of these questions and more with a good understanding of Initial Public Offerings (IPO’s).

Most basically, an IPO is the very first sale of a company’s stock to the public. Conducting an Initial Public Offering is often called ‘going public’ because private companies open themselves to public inspection and investment. To go public, a company must follow SEC (Securities and Exchange Commission) guidelines and report financial information each quarter. The guidelines are designed to protect investors from corporate fraud, so companies must provide a good amount of information to meet the strict standards set by the SEC. Their balance sheets, income statements, and other financial statements must be available for anyone and everyone to read. So why would any company open themselves up to such great amounts of examination and scrutiny?

The answer: Money. Well, money and other benefits. Small private companies conduct IPO’s to get the cash and capital needed to expand quickly. Large private companies give public offerings to gain money and other advantages that stocks provide as well. These advantages include, incentives to attract powerful employees through stock options, support to take on more debt, and the prestige that comes with being a publicly traded company, amongst others. We now know why companies conduct IPO’s, but how do they do it?

They do it with the help of investments banks. Investment banks (think Goldman Sachs, Merrill Lynch) act as ‘underwriters’ that help companies create and submit Initial Public Offerings to the SEC for approval and to the public for sale. Unfortunately, the underwriters usually only sell stocks in IPO’s to institutional investors (the people with a lot of money to invest), so if you’re a little guy, it’s very hard to get in on a fresh IPO.

The most fascinating part about Initial Public Offerings is that they really aren’t offering anything tangible! You see, you get nothing in return for your purchase of stock other than the shares themselves. Technically, you receive the rights that go along with having a very small portion of a company and the dividends that are paid out to shareholders, but that’s it. The stock price is not a reflection of any true physical property of the company, it is simply decided upon by the underwriter and offering company. The price is set high enough to make the offering company money, but low enough to create demand for potential buyers. If the company’s stock price plummeted to zero the day after an IPO, you would be left with nothing. While this scenario is a bit extreme, it should key you in to the risk that goes along with investing in an IPO.

The risk is magnified by the lack of information available for companies that were previously privately owned. The specific history of a company that conducts an IPO is not available to the public, so it becomes very difficult to do the normal research that is conducted before making an investment. Additionally, IPO’s are often hyped up by the underwriters that create them in an effort to entice investors into buying.

So, while you may not be participating in an Initial Public Offering because of their exclusive nature and inherent risk, it is very advantageous to understand how a company arrives on the stock market in the first place and how its stock price was first determined. And at College Trillionaires, we’re all about providing you with advantages.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - January 27, 2009 - CPKI

California Pizza Kitchen, Inc. (CPKI)

California Pizza Kitchen (CPKI), commonly referred to as CPK, is a casual dining restaurant chain with a particular focus on the premium pizza market.  As of January 14, 2009, the company operated a total of 252 locations, of which 204 were company-owned and 48 were operated under franchise agreements.  The company is based in the United States (California), but it has stores in over 8 foreign countries.  Just last week, CPK opened its first Middle East location, as it opened a restaurant in Dubai, United Arab Emirates.

Although it would seem fair to say that a casual dining restaurant would not be a great investment during a recession, as many potential customers do not have the money to spend at restaurants in harsh economic times, there are actually many positive factors that make CPK an intriguing investment.   

The first aspect of CPK that makes it appealing is the fact that it is a relatively affordable casual dining restaurant.  So, even though we are currently in a recession, the prices at CPK are not high enough to turn away everyone except for the people who have been hit the hardest by the economic downturn.  The average dine-in guest only spends a shockingly low $13.37 (including alcoholic beverages).  So, for a family that wants to eat out at a casual, sit-down restaurant, CPK is definitely a very affordable option.  I believe the fact that CPK is so affordable makes it a company that can actually continue to succeed, even today. 

Another factor that is intriguing about CPK is that the company continues to increase its profit margins.  This phenomenon is more of a macroeconomic shift that has affected almost all restaurants.  For most of 2008, raw food costs increased due mostly to higher oil prices.  So, in response to the higher food costs, most restaurants reacted by increasing prices on their menus.  But, as the economy has tanked and oil prices have dropped, the raw costs of food have declined.  In response, though, restaurants have not dropped their menu prices along with the falling food costs.  As a result, they are charging a higher price for food that is costing them less.  Thus, restaurants such as CPK will enjoy higher profit margins in 2009, a great piece of news for any business.

As most of you know by now, CPK sells frozen pizzas in many grocery stores.  The pizza company actually has joined in an alliance with Kraft Foods (KFT), the company that manufactures the frozen pizzas, and currently sells its frozen pizzas in all 50 states in over 17,000 outlets.  CPK’s frozen pizza sales are extremely profitable for the company, but the exposure that CPK receives from its frozen pizzas also greatly helps the company’s brand recognition and image. 

The thing that makes me the most excited about CPK is the fact that the company just recently raised its 4^th-quarter outlook above analyst estimates.  Analysts were expecting a profit of 7 cents per share, but CPK came out and said that it will likely earn between 8 cents and 10 cents a share.  While this may seem like a puny difference (which it is), the fact that a casual dining restaurant was able to post a profit and beat estimates in the heart of a recession says a lot about the resiliency of the company, even when consumers are most hesitant to spend their dollars. 

I believe that CPK is a very solid company that still has a lot of room to grow.  With its solid food, affordable prices, popular frozen pizzas, and overseas and domestic growth potential, I think the company has a great future ahead of it.  As the recession begins to end and the company can begin to focus more on growth, CPK could potentially be a great investment.  If you don’t already own a restaurant company in your portfolio, you should definitely look into CPK.

 

Niki Pezeshki

College Trillionaire

Market Recap - January 27, 2009

The major indexes rose for a second consecutive day as the Dow Jones Industrial Average rose 58.7 points (.72%) to reach 8174.73 and the S&P gained 9.14 points (1.09%) to settle at 845.71. Trading started off downward as the Consumer Confidence Index for January was released, but a rise in the markets was later spurred on by better than expected earnings reports.

The Consumer Confidence Index has been around since 1967. It’s designed to give the government and investors an indication of the willingness of consumers to spend and stimulate the economy (or save and hold the economy back). The Index hit 37.7 for January, which is the lowest it has ever been. High unemployment numbers, declining home prices, poor earnings report, and the extending economic recession has led to an overwhelming lack of consumer confidence. The bad news wasn’t a surprise for investors, though, and the market moved upwards later in the day as earnings reports came out.

Some big names, including United States Steel Corp. (X), American Express (AXP), and Netflix (NFLX), turned out refreshing earnings numbers that were actually profitable. Investors and analysts were especially excited by the news that United States Steel made money during the fourth quarter, as an increase in steel use can be an early indicator of economic upturn. American Express’ share price gained $1.48 (9.74%) on the day, and it proved that financial companies can still succeed when they report 4^th-quarter profits these days (even though these profits were 79% less than those of the 3^rd quarter).

The mix of good and bad news led to another conflicted day on Wall Street and most investors stuck with the good. Investors appear to be battle-hardened as they resisted yet another piece of bad news today in the poor Consumer Confidence Index. Earnings reports will continue to come out the entire week and you can expect any good reports to be followed with good market movements.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 26, 2009 - Short Selling

Short Selling

Short selling is one of the best ways to make money in a downward-spiraling stock market like the one we are experiencing today.  When an investor goes short on a stock, he is expecting the share price of the stock to decrease in the future.  The opposite of shorting a stock is being long.  If you are long on a stock, you are expecting the share price of a stock to increase (typical method of investing).

When you short sell a stock, you borrow shares of the company from your broker.  Eventually, you must buy back the shares that you have borrowed, a process called covering your short.  If the share price has dropped since you first borrowed the stock, you can buy back the stock at the lower share price and make a profit on the difference.  But, if the stock price has gone up since you borrowed the stock, you must buy the stock back at a higher price when you are covering your short.  So, when shorting, you better hope that the stock price goes down if you want to make some money!

Let’s do an example to see how people make money by shorting stocks.  If I decided to short 100 shares of Wal-Mart (WMT) today, I would be borrowing 100 shares at $48.60 for $4,860.  If shares of WMT dropped $10 to $38.60 and I decide to cover my short, I would buy back the 100 shares at $38.60 for $3,680 and sell my borrowed 100 shares at $48.60 back to my broker.  As a result, I have made a profit of $1,000 ($4,860 - $3,860).

Now let’s look at an example of people losing money by shorting stocks.  If I decided to short 100 shares of Johnson & Johnson (JNJ) today, I would be borrowing 100 shares at $56.55 for $5,655.  If shares of JNJ jumped $15 to $71.55 and, out of fear that it was headed even higher, I decide to cover my short, I would buy back the 100 shares at $71.55 for $7,155 and return my 100 shares at $56.55 to my broker.  As a result of this bad decision on my part to short JNJ, I have lost $1,500 ($7,155 - $5,655).

So why do investors occasionally decide to short a stock? The first reason is because they are speculating that the share price is on its way down.  Another reason investors short stocks is to hedge their investments.  Hedging is just another way of saying that an investor is attempting to limit his risk and limit his potential losses.  So, if an investor is long on a few stocks and short on a couple, he will limit his risk if the overall market goes down.  The problem with hedging, though, is that you also usually limit your potential gains as well when the market goes up. 

So, what makes shorting stocks so risky? First of all, history has shown that, over the long run, stocks usually have an upward trend and appreciate in price.  So, by shorting a stock, you are going against a historical trend in the market.  Another aspect of shorting that makes it very risky is the fact that your losses can be infinite and your gains are limited.  There is no limit to how high a stock’s share price can go, so you could potentially have huge (theoretically infinite) losses when shorting stocks. But, the best-case scenario for short sellers is if the stock price goes to zero, so the amount you can gain is limited.  On the other hand, if you are long on a stock there is a limit on the downside, as the worst-case scenario is that the share price goes to zero (but that is the lowest it can go).  But, investors who are long on a stock have unlimited potential gains, as the share price of their stock has no ceiling (it could theoretically keep trading up forever). 

Another risk that comes with selling short is the fact it involves using borrowed money.  Because you are using your broker’s money, your broker has the right to ask for his money back if your losses get out of hand.  This places many investors in dangerous positions, as they are forced to incur huge losses without the chance of making them up if the market begins to turn in their favor.  The fourth and scariest risk of short selling is the concept of the “short squeeze”.  A short squeeze occurs when a stock that many people expected to drop begins to rise.  Due to the rise in the stock price, many of the short sellers who were betting against it try to cover their positions and buy back their borrowed shares. With so many investors buying shares, the stock price can quickly jump to ridiculous levels.  If a short squeeze occurs and you are late to cover your short, you will be in a lot of pain, as you watch the stock you needed to go down continue to race to new highs.

Because of these risks, and because of its counter-intuitive nature, short selling is usually not advised as a trading strategy for novice investors.  As you learn more about shorting stocks and become more comfortable with market trends and analyzing individual stocks, hopefully you will one day take advantage of short selling to make some money!  Until then, keep reading College Trillionaires and keep learning!

 

Niki Pezeshki

College Trillionaire

Stock of the Day - January 26, 2009 - NICE

NICE-Systems, Ltd. (NICE)

I’m bringing you a strong, prospective stock that is largely unknown. The company may be able to thrive in the bear market we’ve found ourselves in. NICE Systems (NICE) is an Israeli company that provides businesses with advanced management for customer contact centers and criminal protection. Basically, these guys help companies in two areas: efficiency (including customer relations) and security. Both functions have great demand in our economy. With the recent trend of layoffs, businesses are in need of effective work. Sadly, fraud and a general lack of trust are prevalent on both Main Street and Wall Street. Knowing this, it would be foolish to miss taking advantage of an opportunity to invest in NICE.

NICE provides its services to both private and public sectors. They have 24,000 diverse customers located in 100 countries, varying from American Express to the Federal Communications Commission (FCC). 85 of the Fortune 100 companies are NICE customers. NICE is consistently growing its business, and most recently it locked in two international giants with multi-million dollar deals: Russian Telecommunication provider VimpelCom (VIP) and China’s Alibaba.com, the global leader in e-commerce.

The stock is currently trading at $19.73 and has a 52-week range of $16.11 – $35.87. The stock price took a big hit in late 2008 as investors quickly sold off because of general fear in the technology sector. I believe that the sell-off has left NICE undervalued. NICE has had double-digit quarterly earnings growth percentages for the past three years. The major deals that the company has made on an international scale should provide a good cash flow for early 2009. NICE focuses on saving businesses money, and this should allow them to keep striking deals throughout the rest of the year.

NICE has a market cap of $1.25 billion, which puts it in the small to mid cap range. Small and mid cap companies aren’t as big as the more established large cap businesses, and because of this they carry more risk. Even though the company is not a large cap, it has $252.81 million in cash and no long-term debt. I believe that these numbers diminish the amount of risk that comes with the fact that NICE is a small cap company.

I find it important to note that NICE is an Israeli company. The ongoing conflict between Israel and its neighbors has been a factor for Israeli-based companies and stocks. I believe that by now the effects of the conflicts have already been factored into NICE’s stock price and the downside external risks are limited. Additionally, the fact that NICE is an Israeli company means that it does not work with U.S. dollars. While this may seem obvious and trivial, I believe that the dollar will suffer from a great deal of inflation and devaluation in the short run if Obama’s stimulus package goes through. This would benefit companies, such as NICE, that aren’t based on the U.S. dollar.

Overall, I am in favor of buying NICE. It has a large and powerful customer base, it has a growing demand in our economy, I believe that its stock has already hit or is approaching its low and is now near that number, its earnings are increasing, it has $250 million in cash, and it does not rely on the US dollar. There is reward to be found in the stock because the market has left a well-run company at a discounted price.

NICE is an interesting, dark horse, speculative stock that you should definitely look into and consider adding to your portfolio.

 

-Matt Schwartz

College Trillionaire

Market Recap - January 26, 2009

A relatively large dose of good and bad news contributed to a fluctuating stock market today, as the Dow Jones gained 38.47 points (.48%) and the S&P 500 rose 4.62 points (.56%). 

One note of positive good news came from the announced megadeal between pharmaceutical giants Pfizer Inc and Wyeth.  Pfizer will acquire Wyeth for $68 billion, in a move that will make the world’s biggest pharmaceuticals maker even bigger and more diversified.  This merger between the two companies was positive news for the markets, as it showed that companies are still willing to partake in deals and partnerships, even amidst a recession. 

There was also a better-than-expected data report from the National Association of Realtors.  According to the report, existing-home sales increased to 4.74 million in December, exceeding expectations that predicted a fall in home sales to 4.4 million.  This report shows that people are beginning to buy homes again, as for the first time in a while, more houses were bought than expected.

But, negative news about the job market and corporate earnings kept the market’s gains in check.  Both Caterpillar (CAT) and Home Depot (HD) announced big job cuts.  CAT announced the job cuts after it reported that its 4^th-quarter earnings fell 32%.  American Express (AXP) also announced today that its 4^th-quarter profits fell 79%, as cardmembers just aren’t spending as much money in this economy. Other companies that reported massive job cuts were Microsoft (MSFT), Intel (INTC), and Spring Nextel (S).  Economists also predicted that at least 2 million more jobs will be lost this year, and that the unemployment rate could hit 10% or higher towards the end of 2009.

While the stock market held strong amid a few threads of good news about home sales and a major acquisition, the bad news about unemployment and corporate earnings continues to linger in the back of investors’ minds.  With more earning reports expected to be announced throughout this week, I think it is going to be an ugly next few days for the market.

Until tomorrow,

 

Niki Pezeshki

College Trillionaire