Stock of the Day - February 4, 2009 - S

Sprint Nextel Corp. (S)

Sprint Nextel Corp (S) is a tricky company to judge.  Although the company has a bunch of problems right now, it is doing some positive things to steer itself into the right direction.  It is a company with solid potential, but it would be nothing short of a speculative investment right now.

Sprint, which is currently the number 3 mobile service provider in the United States, has been stuck in a rough patch for a while.  The company is currently trading at $2.40 per share, more than 75% lower than its 52-week high of $10.36.  It also just recently announced that it would cut up to 8,000 jobs (14% of its workforce) by March 2009 in order to reduce costs by $1.2 billion.  While the company had $4.1 billion of cash at the end of the 3^rd quarter 2008, Sprint owes $600 million of debt in May 2009 and $2.4 billion in 2010.  When you consider that Sprint has a negative earnings per share of $-10.75 and a ton of debt due soon, it is clear to see that its cash situation is becoming dangerous. 

Another factor that is absolutely killing Sprint is that its competitors are stealing its customers.  Sprint, which provides wireless service to only about 10% of Americans, has lost a ton of customers to both AT&T (T) and Verizon (VZ).  Although we will not know exactly how many customers Sprint lost in the 4^th quarter until it comes out with results on February 19^th, it is estimated that Sprint lost 1.1 million to 1.3 million wireless customers.  It is clear that many of Sprint’s customers are going to either Verizon or AT&T, as AT&T recently reported that about 40% of its new iPhone users in the 4^th quarter came from outside AT&T.

While all of this news might sound horrible (which it is), Sprint is doing a lot of things right to turn things around and start becoming more competitive again.

The company has started to put an emphasis on customer satisfaction in order to begin rebuilding its image and to change the perception of the company.  Beginning in 2008, CEO Daniel Hesse made it clear that improved customer satisfaction would be the number one priority for Sprint.  Since then, the company has greatly improved its customer service, it has improved its call quality by upgrading its network, and it has also received higher customer satisfaction ratings for service and repairs.  Improving customer satisfaction will definitely help the company’s image in the long run, and an improved reputation could potentially bring in new customers for Sprint.

Sprint also recently launched one of the cheapest service plans ever.  The new wireless plan charges $50 a month for unlimited voice, texting, web access, and push-to-talk services.  While the new plan will definitely hurt Sprint’s profit margins, at least it will keep some more customers from switching over to Verizon and AT&T.  The plan is so cheap that it will undoubtedly convince some people to switch over to Sprint as well.

The third positive for Sprint is its partnership with Palm (PALM) for the company’s new phone, the Palm Pre.  Sprint will be the exclusive provider for the much-anticipated Pre, which is expected to be sold to the public in May. I have heard a lot of positive reviews about the Pre, and this is great news for Sprint. If the Pre is a hit in stores, as many expect it to be, Sprint will clearly benefit as a result of being the exclusive service provider for the phone.  I think this partnership with Palm is the positive factor that gives Sprint’s stock price the biggest upside potential. 

So, while Sprint is currently experiencing continuous profit losses, massive amounts of debt, and huge layoffs, the future does look brighter.  The company is working out its problems, slowly but surely.  Having said this, I am not a buyer of Sprint right now, because I think it will be a while before the company becomes competitive again.  But, at some point in the future when it pulls itself out of its current situation, I will definitely be more interested in purchasing some stock in Sprint. 

Niki Pezeshki

College Trillionaire

Trillionaire Term of the Day - February 4, 2009 - ETFs

Exchange Traded Fund (ETF)

In order to have a solid understanding of Exchange Traded Funds (ETFs) you must have a good grasp on Indexes. If you aren’t sure what an index is, or how indexes are created and run, feel free to check out our Trillionaire Term of the Day on Indexes (January 9, 2009).

An index is a group of securities, such as stocks or bonds. An Exchange Traded Fund is basically all of the stocks that are in an index grouped into one tradable stock. You can buy and sell ETFs just as you would buy any other company’s stock. Simply put, an ETF is a representation of all of the individual stocks that you would find in an index.

Take SPDRs (SPY) as an example. This particular ETF tracks the S&P 500, which is a benchmark index for large cap U.S. stocks. Investors buy and sell SPY when they see value or a lack of value in the S&P 500. PowerShares QQQ (QQQQ) is another ETF, and this fund holds all of the stocks in the Nasdaq-100 Index (e.g. Apple, Intel, Amgen, etc…).  So, when you buy QQQQ, you are basically buying a little bit of each stock in the Nasdaq-100.

Adding an ETF to your portfolio is a great way to diversify quickly. One share of an ETF essentially contains the all of the different shares in an entire index, so when you invest in an ETF, you’re investing in numerous distinct companies.

 

Matt Schwartz

-College Trillionaire

Market Recap - February 4, 2009

The markets failed to continue the rally that began yesterday, as important consumer discretionary companies announced poor earnings reports. The Dow Jones Industrial Average lost 121 points (-1.5%) to settle at 7956 and the S&P 500 fell 6 points (-.8%) to end the day at 832. Investors and consumers are still looking towards Washington to see the results of an ongoing debate over Obama’s economic stimulus package.

Earnings reports from Time Warner (TWX) and Disney (DIS) came out after the market closed yesterday. TWX reported a fourth-quarter loss of $16 billion resulting from a write down on lower valuations of their cable, publishing, and AOL assets. Disney stated that its profits declined by 32%. The reports from the two entertainment giants made investors fear that consumer spending has been further weakened.

President Obama invoked a $500,000 salary cap for executive compensation for companies that are receiving taxpayer bailout money. The controversial interference of government into business has received mixed reactions. Proponents of Obama’s move argue that executives should not be rewarded for failure. Critics worry that the new measure will cause companies to avoid government help and that executives that have provided legitimate help for their companies will not receive fair compensation.

The movements of the markets for the past few days, while affected by earnings reports, seem to be the result of investors patiently looking towards Washington. It will be very interesting to see what will happen when the massive economic stimulus package either passes or gets rejected in the Senate.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - February 3, 2009 - KO

The Coca-Cola Company (KO)

1886: Drink Coca-Cola. 1939: Coca-Cola has the taste thirst goes for. 1979: Have a Coke and a smile. 2009: Open Happiness. Since the beverage-makers inception in 1886, The Coca-Cola Company (KO) has grown and evolved dramatically. Now, the American originated thirst quencher reaches over 200 countries and doles out 1.5 billion servings a day. Even with the company’s long-term success, the shock taken by the markets in late 2008 has left Coke undervalued. KO is resting at a bargain price, just waiting to be scooped up.

Coca-Cola was trading around $55 to $60 in the beginning of 2008. In October the stock took a dive to $41.50 as a result of general investor fear of the markets. Coke has since bounced back from that price and has most recently traded at $43.32. Follow my reasoning as I explain why the steep drop in price was unwarranted, and why I believe the company will rebound back to the upper $50s.

Coke has been, and will be successful because it has managed to do what very few companies have succeeded in doing. The company has stayed the same, while rapidly expanding and innovating. More specifically, the Coca-Cola brand still maintains a massive amount of power because of the stability of its original beverage and gains strength as it acquires new brands.

Even while Coke still dominates the market share of nonalcoholic sparkling beverages, the company has expanded internationally and currently owns 2,800 distinct drinks. KO owns Minute Made, Vitamin Water, Dasani, Powerade, Sprite, and the list goes on and on, and constantly grows. But Coke doesn’t just grow, it grows effectively. Coke currently has a Return on Equity of 27.76%. This number indicates that the capital it spends with intentions of expansion is succeeding.

Can the 25% drop in Coca-Cola’s stock price in late 2008 be attributed to any internal negative factors? I haven’t found any. Do external macroeconomic support the fall? I don’t believe so. Take the words of CEO, Muhtar Kent, who recently stated that Coke is “at least crisis resistant.” Consumers are still eating and drinking. And when they do drink, they enjoy KO’s brands. Additionally, lowered oil, freight, and other commodity costs have recently reduced Coke’s costs. Day in and day out The Coca-Cola Company will still make cash. Kent struck a soft spot with me when he said that his goal is to “execute flawlessly… and to remain strong when we come out of the recession.”

KO’s 4^th Quarter Earnings Report for 2008 will be reported on February 12^th. The average analyst estimate for the quarter is higher than the last quarter of 2007. Additionally, analysts estimate that Coke will have an Earnings Per Share of $3.12 for the year as a whole. This would be a 15% year over year increase from an EPS of $2.70 in 2007. Coca-Cola’s earnings report should be a refreshing relief from the disconcerting reports that have been all too common lately.

Finally, it must be noted that Coke rewards its investors with a dividend payout of $1.52, resulting in a healthy yield of 3.6%. The dividend percentage is defensible because of the company’s steady cash flow.

The American company that has become a staple in consumer culture deserves to become a staple in your portfolio. The Coca-Cola Company remains rock solid in a time of economic hardship and can be expected to flourish when the markets rebound. This undervalued blue chip is simply waiting for the right time to jump.

 

-Matt Schwartz

College Trillionaire

Market Recap - February 3, 2009

Wall Street edged higher on Tuesday on some positive news regarding home sales.  The Dow Jones Industrial Average gained 141.53 points (1.78%) and the S&P 500 was also up 13.07 points (1.58%). 

The good news from the housing industry came as a surprise, as the National Association of Realtors reported that pending sales for pre-owned homes in December rose 6.3%, compared to home sales in November.  The reason for the increase in home sales is due to the fact that buyers are taking advantage of opportunities to buy homes that are being sold for steeply discounted prices.  This news could potentially be an indicator that the slump in the housing industry is subsiding, and investors on Wall Street capitalized on the news by pushing the markets higher.

Many companies came out with corporate earnings today, and the results were mixed.  Motorola (MOT) lost $3.6 billion last quarter, and Disney (DIS) reported a 32% drop in profits for the 4^th-quarter.  Drugmaker Merck (MRK) reported better than expected numbers, and homebuilder D.R. Horton (DHI) also reported a narrower loss than analysts expected.

Another depressing statistic came from the U.S. auto industry, as U.S. car and truck sales fell 37% in January.  Sales at General Motors (GM) fell 49% and sales at Ford also fell 40%.  This is a horrible start to 2009 for automakers, as people are clearly still not spending their money to purchase cars.  What makes it even worse for carmakers is that home sales actually increased but car sales were still abysmal, showing that the housing industry might recover before the auto industry does.

Tomorrow, many companies are coming out with their 4^th-quarter earnings, so it should be another interesting day on Wall Street. 

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

 

CT Note: Today’s Stock of the Day will be Coca-Cola (KO), but it will be posted a little later than usual.  Keep reading College Trillionaires!

Trillionaire Term of the Day - February 3, 2009 - Average Down

Average Down

Averaging down is an investing technique for bold investors who really have confidence in their stocks.  Averaging down is essentially the process of buying additional shares in a company at lower prices than you originally purchased.  By using this strategy and buying on weakness, the average price you paid for all your shares comes down. 

For example, if I bought 100 shares of Intel (INTC) at $20 per share, the average cost per share for me would be $20.  Let’s say after owning it for a couple of weeks, Intel’s share price drops to $15.  If I really believe that Intel’s share price will rebound, should I sell the stock at $15, or should I take advantage of the drop in share price?  If I employed the averaging down technique, I would buy 100 more shares of Intel at $15.  As a result of my new purchase, my average cost per share of Intel would be $17.50 (100 shares X $20 + 100 X $15 all divided by 200).  Now, instead of Intel having to come back up to $20 for me to break even, I just need the stock to reach $17.50.

Is averaging down a good or bad strategy? Well, if you average down and buy more shares as the stock price goes lower, you will increase your profits if the stock makes a rebound.  You will increase your profits because, not only do you have more shares of the company, but your new average cost per share is lower than your original cost per share.  So, if you really trust the company that you are investing in and believe that its stock price will eventually come back up, then averaging down is great.  But, how about if you keep averaging down and buying more shares on weakness, and the stock just keeps going down without ever rebounding? This is the danger of averaging down, as you will continue to lose more and more money every time the stock price dips. 

Averaging down definitely takes a lot of courage, and you have to be willing to go against the market and buy when others are selling.  But, if you are investing in a solid company for the long term and are confident that its stock price will rebound, averaging down is one of the best ways to increase your profits.

 

Niki Pezeshki

College Trillionaire  

Stock of the Day - February 2, 2009 - EBAY

eBay Inc. (EBAY)

When looking for a solid company to invest in, one of the main things you should be looking for is growth.  You want to invest in a company that is growing in market share and increasing net income and revenues every quarter.  Unfortunately, eBay Inc. (EBAY) is doing the exact opposite of growing.  The online retailer is actually losing money and losing ground to its competitors.

EBay reported a 4^th quarter decline in revenue of 7% and a 30% drop in net income.  This was the first time ever that eBay has posted a quarterly decline in revenue. Ebay.com, the marketplace unit for the company, fueled the lower revenue report, as it posted a 16% loss in revenue for the quarter.  The company also reported that merchandise volume fell 12% from the same quarter last year.

But, there were some positives for eBay.  Paypal, a subsidiary of eBay, increased revenue by 11% and increased its payment volume by 14%.  Paypal also grew its active accounts by 23% to 70 million members.  Skype, a popular voice-chat platform that is also eBay’s subsidiary, posted revenue growth of 26% and increased skype-to-skype minutes by 72% to over 20 billion.  Overall though, the company struggled in the 4^th quarter of 2008, and the future looks bleak.

The biggest problem for eBay is increasing competition.  With companies like Amazon (AMZN) and Craigslist becoming stronger by the day, eBay’s market share in the online retail sector has been falling.  Even GoDaddy.com launched a marketplace service last week, and it offers sellers a model that charges an enticing $4.99 a month for unlimited item listings and 10% on commission from sales. 

But, without a doubt, Amazon has been eBay’s biggest competitor and biggest source of problems.  Amazon just recently came out with its 4^th quarter numbers, and they were nothing short of beautiful.  Amazon’s revenue jumped 18% during the quarter, and international sales rose 31%.  Web traffic on Amazon also jumped 9.8% compared to last year, as eBay’s web traffic dropped 2.5%.  While eBay still gets more traffic than any other online retailer, Amazon is definitely catching up fast. 

So, while it might seem easy to just blame eBay’s problems on the macro economy and say that the company did poorly because people just don’t have the money to shop, Amazon’s success in the past quarter puts that thought to rest.  Amazon proved with its 4^th quarter earnings that it is still possible for an online retailer to be successful in this recession.  I believe eBay’s problems run much deeper than macro economic factors.  The company’s business model is getting old and there are too many competitors doing the exact same thing.  EBay needs to spark up some magic and find a new way to entice customers.  I have no clue what this might entail, but until eBay finds something new to get people excited to buy and sell merchandise on its website, the company has no growth potential.  And with no growth potential, there is no good reason to invest in a company.  Stay away from eBay for now, and wait until the company comes up with some new ideas.

Niki Pezeshki

College Trillionaire

Market Recap - February 2, 2009

There was no major news today on the markets, but the underlying gloomy mood of investors caused stocks to decline moderately. The biggest stories of the day came early, as reports of manufacturing activity came out for January and Macy’s announced a large set of layoffs. Additionally, talk from Washington over Obama’s massive economic stimulus package is still ongoing.

The Institute for Supply Management said today that manufacturing activity fell in January, making it the twelfth straight month that the institute has reported a drop. Manufacturing activity hit an all time low during the middle of the month, but has increased since then.

Announcements of layoffs and cutbacks in spending were all too prevalent in January, and February did not start off with an exception to the trend. Macy’s Inc. (M) said today that it would be cutting 7,000 jobs, or 4% of its workforce. The company will also be cutting its dividend from 13.25 cents to 5 cents at the time of the next dividend declaration. The announcement was yet another harsh reminder to investors that retail is suffering as a result of decreased consumer spending.

Obama’s $819 billion stimulus package bill passed in the House of Representatives last week, despite not getting a single vote of support from Republicans. The stimulus package will be under debate in the Senate throughout this week and possibly the next. Senate Republicans argue that the bill contains too much waste and that the package will not cause speedy financial stimulus. Senators are trying to counterbalance the necessity for a quick passage with deliberation that will eliminate waste in the bill. This will truly be a difficult task, as the Senate bill is already estimated to contain over $900 billion in plans. That is a lot of money for anyone to manage efficiently and quickly.

Until tomorrow,

 

Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - February 2, 2009 - Blue Chip

Blue Chip

A company that is nationally acclaimed, well founded, and financially secure is a blue chip company. A blue chip company that issues shares provides blue chip stock.

Blue chip companies sell products and services that are bought by a very large number of people. They are characterized by deep balance sheets with a large amount of assets. Blue chips tend to succeed, or at least consistently bring in revenue, even in times of economic downturn. Coca Cola (KO), McDonald’s (MCD), and IBM (IBM) are some examples of blue chip companies that provide blue chip stock.

The term was coined by workers on Wall Street who compared the stocks seen on tickers to blue chips in casinos. Blue chips have the highest value in casinos. Analysts and common investors alike analyze the actions of blue chips and their stocks to estimate the general trends of the markets.  So, the next time you here someone talk about a “blue chip stock”, just know that is even more simple than it sounds.

-Matt Schwartz

College Trillionaire

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