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Anand Chokkavelu, are you still shocked? (Fundamentals don't matter much)

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October 29, 2010 – Comments (19) | RELATED TICKERS: LVS , LCC , VMED

Dear Anand,

As you probably remember, on July 16, 2010, TMF published your 5 Wall Street Buy Calls That Will Shock You article.

In that article, you basically stated your opinion that the 5 companies you listed as shocking Wall Street Buys (LVS, LCC, VG, SUI, and VMED) are bad, bad news because of their high debt and lack of profitability.

Here is what you said:

"Still, some buy calls are so outlandish it's shocking.

You'll notice that the companies in the table are all trading near their 52-week highs. That's not damning evidence, but it's a bad sign if, like me, you tend to troll the 52-week low list for bargains.

Next, notice the high debt-to-capital ratios. Except for a few industries (like utilities), a debt-to-capital ratio above 50% sets off a red flag. For Vonage, Sun Communities, and US Airways, that ratio is over 100%. If you're wondering how debt can make up more than 100% of capital, it's because these companies have lost enough money historically to turn their equity negative.

It's risky for profitable companies to hold these levels of debt. All of these companies are losing money and would have to have pretty significant profitability turnarounds to justify their current share prices. Not only that, they haven't been profitable in years. The most recent sighting was Las Vegas Sands in 2008; Vonage hasn't posted a profitable year as a public company.

Yet they're all Wall Street buys."

So that's what you said, and here is what I said in my comment to your article:

"Las Vegas Sands had high debt last year as well, and it was unprofitable too. Last year, LVS was at $2, it's at $23 today.

LCC is a similar story.

Having a buy opinion/rating on a stock doesn't mean that one believes the company will turn profitable, but that its stock price will go up.

I'm not saying buy ratings on these 5 stocks are justified at this time. I'm just saying people who base their buy calls only on debt and profitability miss "easy" 10-baggers a lot of times...

p.s. Last time I checked, stocks of profitable companies with no or low debt lose people money too..."

Well, here is what happened to those 5 stocks you listed in your article:

LVS is up 95% since you published your article on 7/16/10

VMED is up 43%

LCC is up 31%

SUI is up 24%, and

VG is up 13%

Now, I don't know how you feel about it, but I'm pretty sure every single one of us who like to be called Fools would be more than happy if stocks from our real life portfolios had these kind of returns. I mean who doesn't like to have a stock that doubled in 3 months (LVS) or who doesn't like to pick 5 stocks and be up (quite a bit) on all 5 of them 3 months later? 

So, what do you think now? To me, it's clear: TMF 0, Wall Street 1

Honestly, I would really like to hear from you and all other Fools who think "the only right way to invest is to invest based on fundamentals / balance sheets." 

In my opinion, those guys lose money (on their "high quality" stocks) just like anyone else, but somehow they think they are smarter than the "other guy".

And just to be clear here, I'm not saying they are wrong in their approach, I'm just saying I don't like when they call me "stupid" for not following it. I could even argue that my approach (of not paying attention to fundamentals) works better that theirs (which doesn't mean I think it's better).

Thank you for your attention, and I hope you understand this is nothing personal.

I wish you all the best in the future,

DLZ

p.s. I was told, by some of the CAPS memebers who invest based on fundamentals, DJSP was a "great buy". That was when DJSP was at $5, now is at $1...

 

19 Comments – Post Your Own

#1) On October 29, 2010 at 2:08 PM, dragonLZ (99.41) wrote:

Speaking of LVS, I also got reminded of another TMF article: These Are the Top 7 Underperform Calls on Casino Stocks

The article basically said Casino Stocks were a SELL because they had one or two star rating here on CAPS at that time.

I again disagreed. Here is what I said in my comment to the article:

What I'd like to know is what was the LVS rating back in 2009 when LVS was at $2 (1,400% ago).

If it was 1 or 2 star stock back then, that just shows you how "reliable" CAPS community ratings are.

p.s.

Are you trying to tell us to follow these guys?

http://caps.fool.com/Ticker/LVS/Scorecard.aspx?pagenum=1&...

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#2) On October 29, 2010 at 2:12 PM, dragonLZ (99.41) wrote:

And what would a story about LVS be without mentioning this disagreement between GMX, a "fundamentalist", and me?

So far, I think GMX is losing... 

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#3) On October 29, 2010 at 2:20 PM, miteycasey (31.39) wrote:

It's all about risk v. reward.

There was talk about LVS going bankrupt. Obviously it didn't and Las Vegas bounced off the bottom.

For every LVS there is a GM, Enron, or WorldCom that people believe can never go bankrup, but do.

 Remeber rule #1: Do not lose money.

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#4) On October 29, 2010 at 2:23 PM, dragonLZ (99.41) wrote:

miteycasey, I do get that, but we were talking about LVS at $23, not at $2...

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#5) On October 29, 2010 at 2:28 PM, Momentum21 (95.77) wrote:

dragonLZ (99.36) - I read that article and don't think that you two are as far off in opinion as you make it. The headline in the article is misleading of course but I think that is just a marketing thing...

And the DJSP comment is a little off base, although I am not sure the specific reference you are making. DJSP is a similar bet to LVS when "the end" was being priced in. Fundamentally that stock is not looking very good of late...it is another gamble on survival. Most were pitching this bet well under the $5 mark...I started liking it under 2. 

Time frame on a call is everything...and time will tell with DJSP!  

I love your FR call but unfortunately I didn't play it in RL : ) 

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#6) On October 29, 2010 at 2:37 PM, dragonLZ (99.41) wrote:

Momentum21, Anand and I were agreeing it's not the best practice to be buying stocks at 52W highs, but we were disagreeing about the debt / profitability factor when picking stocks.

I threw DJSP in there just because some people who consider my picks to be garbage, thought DJSP @ $5 looked good "by the numbers".

Maybe, I should've left it out, but I thought it might get my point across that there is no foolproof approach to investing...

Good Luck. :)

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#7) On October 29, 2010 at 5:27 PM, TMFBomb (92.96) wrote:

Hey dragonLZ,

I love that you're following up!

I'm running out the door here, but let me quickly respond. First, here are the other comments we each posted in the article (just as context for the others):  

On July 16, 2010, at 8:09 PM, TMFBomb wrote:

dragonLZ,

The difference between last year and this year is the price appreciation you're talking about. Remember that these are companies that are trading near their 52-week high. Las Vegas Sands, for example, was priced in a left-for-dead situation last year. The possibility of total loss was weighed against the potential for a multibagger if the economy/stock market improved (which, in hindsight, it did). Now, not so much.

It's possible that Las Vegas Sands et al beat the market from here...I just don't think it's a great bet.

-Anand

On July 16, 2010, at 8:50 PM, dragonLZ wrote:

Anand, I do agree with that.

Btw., I agree wit a lot of other stuff you said, I just don't think one should discard a stock idea because a company behind it has high debt and is not profitable. I learned that back in 2002 when I watched a bunch of fundamentally bad stocks go from $1-2 to $40-$50.

p.s.

LVS also seemed like a bad idea at $13, back in August ( http://caps.fool.com/Blogs/lvs/244014 ).

End comment.

In the spirit of full disclosure, I went back and looked at how NVIDIA, Monsanto, and Walgreen have performed since then. The market's up around 7-8% and they pretty much have returned right around there.

So, yes, the five stocks I poo-poo'd are doing better than the market and these three stocks. Let me make a few points:

1) It's been less than four months. So as a long-term investor, I'm not ready to cry uncle yet (that said, I'd gladly take a double in four months, as LVS has done). 

2) I don't totally eschew investing in stocks with some bad fundamentals, but I need a good reason to do so. When stocks are at their 52-week highs with tons of debt and losses, I'm generally not excited. Switch those highs with lows and we're talking. I don't regret avoiding LVS in July of this year. I do regret avoiding LVS and MGM in March 2009.

3) What's nice about investing in higher-quality stocks is the idea that time is on your side. Even if the stock price drops a bit, I feel confident in waiting it out. With lower-quality stocks (take Vonage as a good example), it's a race against time.

Hope that clarifies. Fool on and Happy Halloween!

-Anand

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#8) On October 29, 2010 at 9:09 PM, portefeuille (99.60) wrote:

Mr. dragonLZ,

you must remember that people around here post the most absurd things. What is somewhat sad is that they are not even close to being ashamed ... (okay, the majority does not even realise the stupidity of their utterings).

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#9) On October 30, 2010 at 5:47 AM, portefeuille (99.60) wrote:

comment #8 above does not necessarily have to do with anything posted above comment #8.

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#10) On October 30, 2010 at 5:50 AM, portefeuille (99.60) wrote:

My loser is catching up, hehe ...

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#11) On October 30, 2010 at 7:22 AM, dragonLZ (99.41) wrote:

TMFBomb, I'm so glad you responded and so happy you didn't take my post as a personal attack.

I again agree with a lot of what you said in your #1 & #2.

I also think Vonage is a garbage, but my point was "one can never know..." Didn't 90% of Fools think DTG was a garbage stock too when it was at $3 or $10? Today, DTG is a $45+ stock.

Same with your #3. Even though I do agree a higher-quality stocks let you sleep better at night, I also think no matter how confident they make you feel, you can still get a stomach ulcer from them too (let's be honest, no matter how safe you think your stock pick is, a 50%, or even 30% losing position is not easy to feel good / confident about).   

Once agan, I'm very glad we can have a discussion like this.

All the best in the future,

DLZ  

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#12) On October 30, 2010 at 7:59 AM, dragonLZ (99.41) wrote:

Mr. portefeuille, I think you are being a little harsh in your #8.

I'm not imune to posting absurd things myself. But I do agree some people are worse than others. :)

p.s.

Re: #10, are you trying to say my best portfolio is only good as your worst one? :)

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#13) On October 30, 2010 at 10:34 AM, TMFBomb (92.96) wrote:

DLZ,

I appreciate your thoughtful comments as well. And I truly do love that you're keeping me honest...looking back is a great learning tool.

We may be talking a little semantics here as I also agree with much of what you're saying...if a not-so-good stock is being valued as a terrible stock, there's an opportunity. And a good company selling for a premium price may lose you money despite that good business humming along. Price is everything, eh?

I may give you some more fodder...your post has inspired me to make my thoughts a little more formal...I'm working on a follow-up article for sometime this week. I'll post it here when it's pubbed.

Fool on,

Anand

 

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#14) On October 30, 2010 at 2:31 PM, portefeuille (99.60) wrote:

I just like these curve comparisons and try to find excuses for posting them ...

too lazy to find an excuse for posting this one.

 

portefeuille2 might be about to overtake portefeuille ...

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#15) On November 02, 2010 at 4:50 PM, TMFBomb (92.96) wrote:

@dragonLZ 

As promised, here are my more formal thoughts, complete with salacious title and shout out to you:

http://www.fool.com/investing/general/2010/11/02/these-5-terrible-stocks-are-crushing-the-market.aspx

-Anand

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#16) On November 03, 2010 at 3:59 PM, dragonLZ (99.41) wrote:

Thanks a lot Anand, that's very nice of you.

p.s.

I like your BAC buy in your Rising Stars portfolio. Make sure you add some more to that position if you see things moving in the right direction.

Good Luck!

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#17) On November 04, 2010 at 7:31 AM, JakilaTheHun (99.94) wrote:

I'd agree with miteycasey.  All about risk vs. reward.

I invest based on fundamentals.  But I think people get overly conservative and assume that all companies that aren't "great" companies are "bad" companies.  

Discover Financial (DFS) is not generally considered as "great" as Visa (V), since I wrote about it and Visa, comparing the two, DFS outperformed Visa significantly.  DFS might not be a world-beater, but it's a good company.  It's just that the market seems more scared of any company that's not fantastic already.

That said, I don't think Anand is wrong to suggest that some of these companies might not be great investments.  Just because something goes up, doesn't mean it was a "good investment", either.  Sometimes, people just get lucky and the market ignores deeper issues.  But sometimes, it's not so bad to buy these companies at a certain level even if they are a bit below average, because risk-reward is so favorable.  It all depends to me.  

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#18) On November 05, 2010 at 12:02 AM, dragonLZ (99.41) wrote:

Jakila, I can't argue with anything you said.

Btw., your DFS pitch was maybe one of the first pitches I ever read on this site (you and Porte were my first two favorites).

I know Anand is not wrong in his approach, I just don't think debt and profitability are the only two things one should look at when picking stocks during a bull market. I also don't like when somebody says: This is the way you should do it (when there is no sure way to know what will happen).

Just to give you an example (not to you, but to Anand, actually):

I'm pretty sure when LVS is at, let's say, $74, it will see it's share price drop 23% in one day.

People here on CAPS will be asking: What happend? Why the drop? I just bought last week as EPS has been rising for 4 quarters now, they beat the street's expectation for 2 straight years, they are paying down debt, so what gives???

The answer is: The time to buy LVS was below $20 when people said LVS fundamentals stink...

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#19) On December 21, 2010 at 5:01 PM, rofgile (99.30) wrote:

dragonLZ:

 This has been an entertaining blog!  

 Whether "fundamentals" can predict a company's or a stock's future is a really good question!   Dogmatically, fundamentalists love to believe that the "stock market is a popularity contest in the short term but a weighing scale in the longterm".  

 However, maybe a company has bad fundamentals as apparent to some observer X.  1st, are they really bad fundamentals?  Maybe getting a high debt was a smart move that will grow a business 2 years from now?  Maybe having lots of cash on hand really means that the leadership has no good ideas?  Who decides what the "fundamentals" really mean?

 I get bugged by TMF running little articles that supposedly examine the fundamentals of a company, usually by some automatic screen.  Are these really worth anything?

 -Rof 

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