Anand Chokkavelu, are you still shocked? (Fundamentals don't matter much)
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...
RSS Headlines
Fool UK