Listening to the sound of the waves....and picking through the debris...
I love the sound of the ocean waves. It’s not just the sound, it’s the fresh air and sense of the Earth’s power. Sometimes, when the wind picks up and the waves get higher the sounds and feel of nature start to become scary. A small storm can grow and the howling winds and crashing waves can leave behind some serious damage. Eventually the winds and the waves calm and when you go out to survey the damage you can see first hand how damaging the small storm became when it grew. Already the waves are rearranging the sand and cleaning the beach of the debris.
About 33% of the analysts now say we have a chance of a double dip recession. While that’s a 67% chance we won’t have a double dip, when it comes to our money, the odds seem a bit uncomfortably high, even for a bull. Our money is often measured in comparison with our health and our family in its importance to us. Perhaps that’s a bit excessive and it shouldn’t be, but that’s human nature. If you had a 33% chance of something happening to your family or your health, you’d be very concerned. We know Fear garners Fear and it’s difficult to break out of that cycle.
When we study the markets there are many studies that show that playing the swings by attempting market timing is one of the worse things you can do in the long run. Running however is human nature. Trying to catch a falling knife is also dangerous. Even though I’m a bull, I’ve learned to be cautious. If the matador is waving the red cape and has a sword in his hand, he won’t get any satisfaction out of the crowds booing me as I tuck my tail and run. When the market starts to run it sets off a cycle that feeds on itself. I’ll admit that this bull trimmed some holdings the last week, especially in my retirement fund. When the fund managers consolidated the orders for the previous day they had no choice but to sell off some holdings in the mutual funds. Now, if you have to sell off holdings which ones are you going to chose. The markets a moving frenzy and you don’t have much time. I do agree with Alstry, the computers will help makes some decisions, but who programmed those computers? Sell the equities that highest dollar, raise the cash as quickly as possible. So the markets were up at 9:30 am on unemployment numbers, then down sharply as fund managers had to liquidate. Rumors of further Euro decay, Italy and Spain and possible intervention by the EU oscillated the scared markets.
If you’re a company reporting earnings in the middle of this selloff, you’re subject to some special attention. The computer programs are already focusing on your pattern.
I don’t want to miss out on up days and ruin my longer term returns, so down days for me are shopping days. I’ve found that if you’re going into the market when everything is on sell, but when there might be even better bargains the next day or the day after that I’d rather buy the sale items that were already discounted. When I see another down day, often times the extra special bargain holds it’s own. There are only so many sellers of an equity before the base begins to form again. I know I can’t call a bottom on the market, and I’d be hard pressed to call a bottom on an equity. If it’s a high beta equity with no income, (biopharm, exploratory driller/miner, etc) then the bottom is when the selling stops.
For an equity with a stable history and stable income, the bottom can be a little bit more predictable, (I think). ;) Usually in a single equity selloff I like to wait 2-3 days and see the base form and the volume abate. In a market selloff sometimes the best deals are only there for a short time, even if you risk the falling knife.
Here's one of several examples that I reseached the last week and make a real life purchase.
When the market is crashing and you are reporting earnings, then sometimes you get stabbed a few extra times with the skewer. Dolby Laboratories, Inc followed the markets the first part of the week, down about 10% going into earnings. When you factor in the other 18% on Friday after the earnings report and compare it to the peak in January, you're down over 50%. Since Dolby Labs has been a Motley Fool Stock Advisor pick three times sine it debuted in 2005 I guess I shouldn't be surprised to see the Motley Fool bashing that has started after the plunge. It seems some people just love it when they are eventually proven right and someone else is wrong.
In this case, it certainly pays to have a diversified portfolio as earnings data this cycle has resulted in a wave of very measurable price changes. I'm certain I can find 50 equities that have either gone up more than 10% or down more than 10% on earnings day this cycle. This certainly goes to show how reliable analysts and market pricing is.
That Dolby reported in a market crushing two day period definitely increased the number of lashes the market dispensed. It also meant that the interpretation of the reports was done much more hastily as focus was on the blood letting going on in the rest of the market. Dolby reported near in-line with a flat EPS of $0.55. Flat lately is apparently bad. The hasty part, however, may have been the interpretation that so far, Dolby Labs is not an automatic licensing shoe-in for Windows 8. While Window 7 revenue has been about 25% of Dolby's revenue and it's loss might warrant some lashes. The reality, however, is that:
1. This will not affect Dolby until at least 2013.
2. Dolby, if not included can still license it's products to the PC makers, such as Dell, HP etc.
3. Dolby's PC sales are a fraction of it's total placement which is growing.
When you measure Dolby's cash flow and earnings they have shown solid growth EVEN during the 2008-2009 recession. (Over 15% increase between 2009 and 2010) and 31% profit margins the last year. (The flat EPS was partially due to accounting changes between 2010 and 2011). Factor in the $7 per share cash, no debt, the solid cash flow, and the stock buybacks, (just renewed) and you have a company that is about as double dipped recession proof as you are going to find.
Now back, briefly, to the criticism of the Stock Advisor, (the flagship MF paid service) recommendations.
1. I think the sell off was overdone because their was no time to interpret the Microsoft Relationship. (Transfer to the PC makers if needed).
2. The earnings came on a down day, accelerating the drop.
3. If you had bought Dolby when in 2005 you'd still, (after a 50% seven month drop), be kicking the S&P by about 30%. Certainly not as much fun as the 150% you might have been in January, but the ride is not over.
4. If you were diversified you probably wouldn't have felt the motion sickness quite as much.
Fortunately, for me, I can be a little upbeat as I didn't own Dolby before the selloff. I have this phobia about buying something that is doing well. I'm not sure if it's caused by:
1. The fear that I've already missed out and there isn't as much gain left for me.
2. I'm jealous of those who did invest.
3. I have this subconscious desire to hurt myself.
So what does that mean now? I don't know, if I did I'd be unsuccessfully running a hedge fund somewhere, (see 3 above). My meager trading/investing experience, especially in the crashes of Oct '08 to March '09 is that MANY of the equities that got hammered in the earlier rounds of the sell off were actually above their 2008 lows when the bottom settled in 2009. Those equities that got overly punished built their base and rode the waves. Name brand company's with strong earnings were quick to recover and exceed their previous levels.
Dolby was $42.61 Sept 15th 2008, $25.56 March 9, 2008, then $67 Jan 1st, 2011. It not only bounced back, it excelled, because all through the recession it continued to grow.
No anyone who looks at a company's past performance and things it's a reflection of the future isn't going to last very long in the investment world. Many company's don't innovate or get squeezed by newer technology or competition. Looking at past numbers are useful, but shouldn't be the basis of an investment decision. Mr. Efficient Market/Analysts NOT could have had things wrong and maybe the correction is correcting a longer standing inefficiency.
IN the case of Dolby, however, there is nothing in the history that tells us that they are subject to a double dip recession anymore than anyone else. In actuality, they have proven they can ride through it. Dolby is an innovator and even in a recession there are some things consumers will stretch for. I thought in the last recession that auto makers and auto parts makers were in trouble. Was I wrong! It seems that when people lose their jobs they will give up their houses, but how many gave up thier cars or thier stereos? Look around...how many cars are in the drive way at Mom/Dad's where the kids moved in? How many in front of the three decker apartments where those foreclosed on moved into.
So, for me, it's a chance to get a piece of an innovator, solid cash producer, at a bargain price. If things don't go optimal for Windows 8 in the next two years I'll see if Dolby makes up for some of it with the PC makers. If not, I still have a cash machine buying back its shares. I fully believe that market selloffs have no mentality in choosing their victims; the market in these cases is extremely inefficient. The more I can leverage the inefficiencies the less risk I will have during further panic. If Dolby drops further in more market selling or more mis-interpretation of the reports then who am I going to blame?? No one, not even myself. I'm going to continue researching, evaluating and investing Dolby and other equities. I'll diversify. I certainly won't blame the Gardner brothers if I buy Dolby after doing my own DD, I don't see them forcing me to be so Foolish.
TSIF, the Sky isn't falling today....the storm is overhead and I don't know when it will pass, or if we will get fooled by the calm in the eye for a short time, but I'm ready to pick through the wreckage and see what Mothe Nature has uncovered.