As I get back into the flow of investing -- after a bit of an investing hiatus during most of my college years -- I find myself returning to questions that many new investors tend to ask. It is fair to say that I am still in the process of determining the best strategy for my own portfolio.
I am still young enough where I can "experiment" with different strategies without losing sleep at night. For instance, I think the Pencils IRA Project will be a fun project to run for at least a year (maybe more depending on community interest and how the portfolio is performing), and then track over the next 5-10 years and beyond. I think identifying businesses with dynamic management, strong company cultures, and innovative product lines could be a sound market-beating strategy for the long haul. Time will tell based on how well this particular project does over the next several years.
Most importantly, for me, is that the Pencils IRA Project gives me the opportunity to write my analyses and reasoning and track them over time. This is something that every investor should do -- regardless of their individual strategy -- in order to allow meaningful reflection and learning as we invest.
Focusing on long-term potential of businesses has also helped me tune out short-term market noise. I remind myself that I am not investing in a business based on speculation from me (or others, for that matter) of where the stock will be in three months. I happened to start investing in 2005 and 2006, essentially the peak of the bull market before the market began to fade and the economy eventually entered the Great Recession. I got discouraged with my portfolio's performance atprecisely the time I should have been buying -- this is not a mistake I plan on repeating.
My timing of entering the market may be similar this time around (you've been warned). I don't know where the market is going the next several months... nobody does. Looking back on the first investments I made nearly nine years ago, however, I see that the greatest investments in my portfolio stemmed from businesses with innovative product lines guided by dedicated and visionary leadership who had a focus on long-term performance: Chipotle, Netflix, Monster Energy, etc. This is why I am placing such an emphasis on these traits as I begin to get back into my investing flow. I truly want to focus on businesses that can flourish over the next ten years and beyond. It is critical to find leadership dedicated to (and capable of) sustaining long-term growth for all stakeholders.
With all this said, below is an article I wrote expanding on some of these thoughts with regard to allocating funds within a portfolio and building a strong portfolio for long-term success. I hope these thoughts are helpful to some!
Building a Portfolio for Long-Term Success: http://www.fool.com/investing/general/2014/04/09/building-a-...
New investors often ask the question, "How much money should I allocate to each investment I make?"
This is a great question! And the honest, realistic, and Foolish answer? It depends on the investor.
Mold your strategy around you
In a working adult's IRA, the dollar amount allotted to each investment will likely be considerably higher than what I can allocate to investments in my individual portfolio as a student in college.
Even so, the meager $80 I invested in Netflix (NFLX) in 2006 is worth well over $1,000 today. Netflix ballooned from 5 million subscribers in 2006 to more than 44 million subscribers in 2013 and counting, expanding sales at an average rate of 23.5% annually between 2006 and 2013.
Netflix shareholders have benefited greatly from the visionary leadership of co-founder and CEO Reed Hastings, who from the very beginning recognized the need for Netflix to adapt to new mediums.
In his 2005 letter to shareholders, Hastings wrote, "The winners in downloading will be the companies that provide the best content and the best consumer experience, and that's what we do best." Less than a decade later, not only is Netflix an undisputed leader in streaming movies and TV programs, but the company is also producing its own original content. What a difference visionary leadership, an innovative product, and 10 years can make.
As you search for your own multibagger investments, keep in mind these (paraphrased) words of popular Motley Fool member Tom Engle (TMF1000): "If a company is the next big thing, a little position is all I need. If it isn't the next big thing, a little position is all a want."
Peter Lynch, investor extraordinaire and former manager of Fidelity's Magellan Fund, puts it this way: "All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don't work out."
In other words, individual investors don't have to bet big and commit all of their investing money to one or two investments. Building a diversified portfolio of quality businesses with great long-term prospects is the best way to achieve market-beating results over the long haul.
With this in mind, it is helpful to focus on percentage allocation, rather than the dollar amount invested in each stock. A rule of thumb used by some investors is to invest enough funds in each position so that commissions make up no more than 2% of your total investment. In other words: If your brokerage charges you $7 to buy shares of a stock, the minimum amount you would want to invest with each trade would be $350 (of which 2% is $7). This helps ensure that commissions do not eat up a significant portion of your investing dollars.
Opportunities with diversification
When a stock jumps in the short term, it can be easy to convince ourselves that we should have purchased more shares of that stock. But would you have felt comfortable holding a larger position if the stock had dropped 20%? Consider this when determining how much you want to invest in any given business.
We should be confident in all of our investments, but the benefit of diversification is that we can begin to look past the short-term volatility that will inevitably come about when investing in individual stocks. So consider expanding your portfolio beyond just a handful of stocks. We want to invest enough so that we benefit if a business succeeds over the long haul, but we also don't want to invest so much in one position that we hyper-analyze every little market movement and panic if the stock doesn't perform as anticipated.
Some investors opt to "buy in thirds," easing into individual stocks by purchasing their total position in increments of one-third over time. A potential downside to this strategy is the fact that the long-term trend for the market is to go up, in which case delaying investments into thirds over time can sometimes be counterproductive (or less rewarding than opening a full position from the get-go). On the other hand, going all-in with a full position right away can be difficult to stomach if the market or the individual stock should take a turn for the worse.
Foolish bottom line
It is important to manage your portfolio in such a way that leads you to focus more on the underlying businesses behind your stocks -- and the long-term prospects of those businesses -- rather than getting caught up in short-term market movements. Allocate your money in such a way that maximizes your confidence and comfort levels and minimizes uneasiness with your investments, allowing you to keep the bigger picture in mind. Volatility is all but guaranteed with individual stocks, but focusing on the business behind each stock can help investors avoid emotionally driven decisions based on short-term price swings.
The Pencils IRA Project -- a personal real-money portfolio -- is my attempt to build a portfolio of quality businesses with significant potential to generate market-beating results over the long term. The dollar amounts allocated to the individual positions in this Roth IRA portfolio are nothing huge, but the portfolio will prove to be lucrative over the long haul if only a few of the holdings prove to be big winners. With investing, starting small is better than not starting at all.
Thanks for reading!
David K [more]
Facebook is another company that looks overvalued by standard measures of valuation (P/S of 19.75 and a P/E of 100.64). The stock is clearly priced at a premium, but for good reason: the company's culture/leadership, financial performance, and continued innovation are all top notch. Facebook is another candidate for the Pencils IRA Project, and for now this CAPS pitch gives a basic overview of my feelings about the company.
I think there is a good chance Facebook will be a $300 billion+ company by 2019, in which case the stock would likely outperform the market by a sizable margin. Here are the top four reasons I think Facebook is poised for stellar long-term performance:
1. Mark Zuckerberg is 29 years old. More than a decade younger than Elon Musk. 20 years younger than Jeff Bezos. And yet, Zuckerberg has a 97% employee approval rating and Facebook receives a 4.6/5 rating on Glassdoor. Zuckerberg, who hasn't even been on the planet for three decades, oversees one of the world's premier and innovative company cultures. I think this bodes well for Facebook's long-term outlook.
2. Facebook is a cash machine. The company produced nearly $3 billion in free cash flow in 2013, up from roughly $400 million in 2010. As of December 2013, the balance sheet had $11.45 billion in cash with $476 million in debt.
3. Sales, earnings, and cash flow have both grown at average annual rates over 40% over the past four years. The stock is trading at a premium today, but I would expect nothing less given the growth of the business and its bright long-term prospects.
4. 1.23 billion users. Through internal product development and acquisitions, Facebook is finding ways to reach and monetize current and new customers. In many ways, Facebook has just scratched the surface of what it can accomplish with such a massive (and growing) base of users.
People laughed when Yahoo attempted to buy Facebook for $1 billion in 2006. Many thought Yahoo was nuts, because "social media is just another fad." 8 years later, Facebook is worth $157 billion, more than 4.5 times Yahoo's value today.
As Facebook continues its innovative streak in the realm of social media, virtual reality systems, and helping connect the world, I expect the company's exceptional performance to continue for the next five years and beyond.
David K [more]
RetailMeNot (SALE) is a company that has intrigued me lately and is a candidate for an upcoming addition to the Pencils IRA Project portfolio. I thought I would share some initial research and see if we can get a discussion going on this business.
RetailMeNot is the largest online coupon marketplace in the world, with over 500 million visits to its website over the past year. The company, in short, connects consumers with digital coupons offered from a variety of retailers around the world.
Initially, like others, I was unsure if this gives RetailMeNot much of a competitive moat. However, the company's strategy is similar to Zillow's: advertisers (or, in this case, retailers) follow the views. Retailers want their coupons to go to the widest audience. This is where RetailMeNot has a tremendous advantage, given the ~500 million yearly website visits (and mobile app use) mentioned above.
RetailMeNot's business model, while simple, is validated by the growing number of businesses entering the digital coupon field. Groupon (GRPN launched its "Freebies" coupon service toward the end of 2013 in the U.S. (http://articles.chicagotribune.com/2013-11-20/business/chi-g...) Coupons.com (COUP) is another competitor in the digital coupon space.
RetailMeNot's mobile app has more than 11 million downloads on iPhone and Android devices. This presents a major opportunity for RetailMeNot to empower and engage retailers to deliver a more interactive consumer experience. RetailMeNot's In-Store Solution -- a tool that allows consumers to take advantage of in-store coupons online ("connecting online shoppers to offline sales") -- which has been well received by retailers thus far (probably due to the fact that preliminary research suggests retailers see significant returns on investment when using the In-Store Solution):
Forrester interviewed and surveyed a dozen RetailMeNot retail partners that had used and tested the company's online and mobile promotional channels measuring the impact of those initiatives on the organization's in-store sales. Based on the creation of a composite retailer and their use of the RetailMeNot In-Store Solution over three years, the study found a significant return on investment that provided — at low labor costs — growth in incremental revenue driven by increased transaction volumes and higher average order values....
The following are actual quotes from retailers in the study lauding RetailMeNot's In-Store Solution:
"We want to engage with our customers whenever and wherever they want. The RetailMeNot In-Store Solution helps us connect with customers in the real world while on mobile devices. With the RetailMeNot app, they get a push notification when they are near one of our stores or based on a promotion schedule. That brings many of them into the store. If they choose to visit us online, we are more than happy to convert the customer that way. Regardless, it is a fantastic win for us."
"Adding the ability to measure the impact on in-store sales has been one of the top benefits to the program. We test multiple offer types weekly."
"The In-Store Solution makes it easier for us to interact with the customer on the go. We have a big initiative for omnichannel and mobile. RetailMeNot is very large part of that." - http://www.prnewswire.com/news-releases/study-by-independent...
RetailMeNot's innovation with services such as the In-Store Solution will help the company continue to develop and expand relationships with retail partners. As we will see with the company's financial performance, RetailMeNot's strategy has paid off thus far.
RetailMeNot's sales have grown at an average annual rate of 87.83% to $209.84 million in 2013 (growing 45.03% in 2013). The company has produced positive free cash flow over the past four years, although operating cash flow (and free cash flow) both fell in 2013. Free cash flow production has increased at an average rate of 80.1% annually to $25.04 million in 2013. This free cash flow production -- along with stock issued two out of the past four years -- has helped the company accumulate $165.88 million in cash with $41.31 million in debt.
While RetailMeNot saw cash flow decrease a bit in 2013, I don't question the ability of the business to generate sufficient cash flow. The company is quickly expanding -- as its insane sales growth suggests -- and I like the steps management is taking to ensure long-term growth.
Net income grew 21.32% to $31.53 million in 2013, making for a profit margin of 15.03%.
RetailMeNot's management team is one of the main factors that continues to spur my interest in the company. Cotter Cunningham founded RetailMeNot in 2009 and continues to serve as CEO, having brought on board executive talent from Austin, TX, tech circles. I encourage anyone interested in learning more about the management team to check out the bios of company's executives: http://www.retailmenot.com/corp/executives
RetailMeNot holds a 4.1/5 rating on Glassdoor, while Cunningham receives an 88% employee approval rating. This is with only roughly 25 reviews, so it should be taken with a grain of salt, but worth noting nonetheless. This compares to 2.9/5 rating for Groupon (with a 60% CEO employee approval rating) and a 3.2/5 rating for Coupons.com with a 61% employee approval rating for the CEO.
RetailMeNot has made several acquisitions since its founding in 2009, which makes the positive employee reviews all the more notable:
Through all of the acquisitions, RetailMeNot has been able to maintain its corporate culture by treating employees the right way, Cunningham said. It got 60 employees through the acquisitions.
“We believe people work hard for us, so we need to work hard for them,” he said. - http://www.siliconhillsnews.com/2013/10/31/persistence-and-c...
In the Q4 2013 conference call, Cunningham and company reiterated their focus on generating long-term growth and results:
"We remain focused on investing for long-term growth by continue to extend our markets, enhance our product offerings and increase consumer engagement. We will continue our investment philosophy of investing for long-term growth while maintaining strong adjusted EBITDA margins as we scale our business....
We continue to see strong positive trends across our business including traffic growth, monetization, consumer engagement and retailer adoption of our mobile solutions. We believe the investments we are making in the business are setting us up to extend our leadership position in the large and growing market for digital marketing solutions." - http://seekingalpha.com/article/2000911-retailmenots-ceo-dis...
Management expects revenue to grow approximately 27% in 2014, so as the company scales its operations revenue growth is diminishing overall. Currently the stock trades at a P/E of 152 and a P/S of 8.92. The stock is certainly priced at a premium, but this doesn't mean that it is automatically a lousy long-term investment. If the company can continue to grow sales (and income) at rates of 20%+ over the next several years, the stock can grow into its valuation while rewarding patient investors with market-beating returns.
Let's start by evaluating RetailMeNot with the P/S ratio. Groupon trades at a P/S of 2.15 and Coupons.com has a P/S of 10.03. Both companies are growing at slower rates than RetailMeNot -- Coupons.com still has negative net income and cash flow production.
Currently RetailMeNot's sales per share is $9.09. If the company can grow sales by 20% annually over the next five years and trade at a P/S of 2.15 in five years, here is where the stock would be in 2019:
9.09*(1.2^5)*2.15 = $48.63
Yikes. Not very appealing considering today the stock trades at $35.16. However, one might argue that RetailMeNot would trade at a higher P/S ratio in five years if the company continues such impressive revenue growth rates. We can use the same scenario above, except let's assume that the company grows sales at22% annually and trades at a P/S ratio of 3 in 2019:
9.09*(1.22^5)*3 = $73.70
In this scenario, the stock would more than double over the next five years and provide investors with ~15% annualized returns. When utilizing the Future Value technique to evaluate stocks, it really comes down to what we think is realistic for a company to attain. There is no way to definitively know how the market will value any given stock down the road, but we can do our best to project realistic scenarios for a company to expand sales/earnings and how the market might value those results in future years.
Of course, this is why it is worthwhile to delve deeper into companies. The more we learn about a company, the deeper our understanding (and ability to make realistic projections) becomes. I still have things to learn about RetailMeNot -- particularly the competitive environment and the company's ability to expand going forward -- but I am generally growing more optimistic about the business as I learn more about its visionary management team, continued innovation, and impressive performance up to this point in time. I don't think it is out of the question for the company to grow sales at 22%+ over the next 3-5 years.
Conclusion, for now...
I aim to do some more research into RetailMeNot, but this is an intriguing company worth another look by Foolish investors. Honestly, I don't think any of my friends take advantage of digital coupons through services like RetailMeNot or Groupon (if they do, it certainly isn't a regular occurrence). I think this concept has quite a bit of room to run, particularly as RetailMeNot expands its relationships with retailers around the U.S. and internationally. Given the company's sales growth over the past several years, there has clearly been growing consumer interest in digital coupons.
I also encourage anyone interested in learning more to check out Brian Shaw's (TMFBrewCrew) article on RetailMeNot from February: http://www.fool.com/investing/high-growth/2014/02/18/retailm...
Thoughts on RetailMeNot?
David K [more]
Yesterday SolarCity released its official 4Q 2013 numbers (which had previously been delayed due to accounting reasons). Pretty cut and dry, but one thing I was interested to see was an update on the company's total customer count. CEO Lyndon Rive mentioned this in yesterday's press release:
"Finally, we signed our 100,000th customer earlier this month and expect residential MW booked to surpass 100 MW in Q1 2014, putting us on a clear path to achieve our target of 475 MW - 525 MW Deployed in 2014." - http://investors.solarcity.com/releasedetail.cfm?ReleaseID=8...
We know that SolarCity had 92,998 customers at the end of December 2013. According to Rive, SolarCity hit customer number 100,000 early this month. As reported in the company's preliminary 4Q 2013 press release and conference calls over the several weeks, this January the company signed a record number of energy contracts, and that record was broken the following month in February.
This is important to track, primarily because the Rives have the ambitious goal of obtaining 1 million cumulative SolarCity customers by 2018. The company just reached the 10% milestone of this goal. By my calculations, this leaves 59 remaining months -- between March 2014 and December 2018 -- for SolarCity to reach the Rives' goal of 1 million customers by 2018. This means SolarCity will need to add an average of 15,254 new customers per month between today and December 2018 to reach 1 million customers.
SolarCity added roughly 7,000 customers this January and February combined to push SolarCity to the 100,000 customer mark in early March. We can estimate that SolarCity is currently adding approximately 3,500 new customers each month. Of course, we should expect this monthly customer growth to increase over time as SolarCity improves its internal efficiency and scales the business on a national level. The company does have quite a way to go, understandably, before it is close to bringing on new customers at a quick enough rate to meet the Rives' 2018 goal. This will be a key item for us to follow going forward.
If SolarCity does come close to 1 million customers within the next four years as the Rives are projecting, it is safe to say that utilities will no longer treat SolarCity as a mere inconvenience or very minor competitor. Right now, SolarCity's 100,000 customer count spread over 14 states is probably not turning many heads. If this number comes close to 1 million, though, SolarCity will likely be treated as a serious contender in the energy delivery business.
I hope SolarCity can expand its strategic partnerships to include more traditional utilities. Without utility partnerships, the company will face more roadblocks especially as the business expands and captures a greater percentage of the energy delivery market. In other words, if SolarCity is facing push-back now, you can bet that push-back will increase as the company nears 1 million customers. Partnering with utilities today may help alleviate some of these competitive pressures.
SolarCity tends to have more political and public support than utilities, so I do not expect any regulations to be significantly changed in such a way that prevent the success of SolarCity's business model. Heck, if SolarCity is signing cities up for solar installations and saving city governments thousands of dollars each year (in cash-strapped California, no less), that's got to count for some diplomatic sway: http://www.solarcity.com/pressreleases/231/-SolarCity-Helps-...
Still, if the company continues to face delays or push-back from utilities, SolarCity may have a tough time bringing on new customers at a fast enough rate to justify such a premium to the stock price. This isn't so much an immediate problem as it is something to keep an eye on down the road, but something worth keeping on the radar nonetheless.
Anyway, just a few thoughts running through my head. SolarCity is still a fledgling pioneer in this field and, as I've stated many times before, has hardly scratched the surface of its potential. Between the Rives, Musk, and the leadership team these guys have assembled, I am confident they can find ways to begin collaborating with willing utilities across the country. It will be interesting to watch how this progresses in the coming months and years.
David K [more]
I had the pleasure of teaming up with my buddy and comedic genius/Fool Dan Rubin (BroadwayDan) to write this article for the Fool. In addition to getting me hooked on Shark Tank, Dan is a quality individual with a knack for all things Foolish. I hope we're able to collaborate on more pieces going forward.
The questions poised in this article are key. I grew extremely frustrated with my investments in 2008 and 2009, partly for political/economic reasons (bummed with the bailouts, stimulus, etc.) as well as being discouraged with my sluggish returns since I started investing in 2005. When you find yourself getting discouraged with stocks, that is usually an indicator that you should especially be investing in stocks at that point in time.
Buffett's adage to be fearful when others are greedy and greedy when others are fearful is a good one to practice. I learned the hard way that if you ignore stocks due to discouragement, you will likely miss the ideal time to be investing in stocks (as evidenced by the market's stellar performance over the past 4-5 years). This is because you are likely not the only investor who is discouraged. A mass exodus from the market due to discouraged and/or shortsighted investors can cause many businesses to fall to discount levels (and, therefore, be exactly the ideal time for us to be investing rather than leaving the market).
By building a portfolio of quality businesses, we can begin to look past the hype and short-term market volatility. The examples provided in this article exemplify why short-term drops alone (even 50% or more) should not phase long-term investors focused on the underlying business behind each stock.
How Fear Kills Your Stock Market Returns: http://www.fool.com/investing/beginning/2014/03/16/how-fear-...
As investors, we're often taught to control our emotions. But this is easier said than done. Why is that?
The reason is that for hundreds of thousands of years, human beings adapted to a world where our immediate survival was threatened daily by predators, bad weather, and opposing clans who would gladly haul off our mates, steal our food, and club us to death. In response to these threats, our bodies have learned to flood our bodies with hormones, priming us to fight or take flight.
The problem is that our brains have evolved to help us survive in a world we no longer live in. Independent educator Josh Kaufman notes in his summary of John Medina's fascinating book Brain Rules: "Since we're trying to run modern software on ancient hardware, our prehistoric brains constantly magnify perceived threats and overlook opportunities. That's why humans often do so many irrational and inefficient things."
What goes up must come down?
With the market rallying for the past several years, many of us are sitting on meaningful gains in popular stocks like Activision Blizzard (ATVI), Netflix (NFLX), and Under Armour (UA). While these gains should instill feelings of joy and inner peace, they often create anxiety. We are hardwired to defend what we've acquired. Ever feel your heart race or your palms sweat as you listen to an expert explain why your investment is massively overvalued and sure to take a 50% to 75% haircut?
You've got kids to put through college, retirements to fund, and plumbing to fix. What if Activision Blizzard's Destiny flops? What if the government kills net neutrality and drives up costs for Netflix, and the company can't pass those costs along to customers? What if men become sensitive to the fact that Under Armour shirts expose their "man boobs"? These worries can quickly paralyze you with fear -- much like saber-toothed tigers once did to our ancestors.
Focus on the fundamentals
"Unless you can watch your stock holding decline by 50% without becoming panic-stricken," says Warren Buffett, "you should not be in the stock market." Long-term investors embrace the inevitable short-term volatility of the stock market.
Activision Blizzard shares were cut by more than half in 2008, yet the stock has still gained more than 1,200% over the past decade. Activision's experienced and innovative leadership -- guided by chairman Brian Kelly and CEO Robert Kotick, both of whom have been with Activision since 1991 -- have rewarded patient long-term investors with astounding market-beating returns.
Netflix investors have been similarly rewarded under the innovative leadership of co-founder, chairman, and CEO Reed Hastings, with the stock returning more than 1,100% since 2004. In 2011, however, Netflix shares fell 60% after the company announced its intentions to split its DVD-by-mail and Internet streaming services (the "Qwikster debacle"). Facing immediate backlash after announcing this decision, Hastings and company quickly changed course and announced that the DVD and instant-streaming services would remain under the same roof. The stock has since increased more than 500%.
Shares of Under Armour have increased more than 800% since the company went public in 2005. However, after three years of trading publicly, the stock was down 50%. Short-term traders and emotional investors would be quick to throw the company under the bus, while patient long-term investors have been rewarded with a market-beating investment under the leadership of founder, chairman, and CEO Kevin Plank.
In all three cases, these businesses continue to be led by experienced and innovative management teams. For patient investors with a long-term outlook -- five to 10 years and beyond -- Activision, Netflix, and Under Armour are prime candidates to continue to deliver market-beating returns over the long haul.
Questions of balance
Before you race to sell your winners, take a moment to calmly consider some questions. What is the time frame of your investment? Has the story behind the stock changed? Has the CEO's vision for the company changed? Do you still trust the integrity of management? Has the world changed so much that your company's products are obsolete?
Ask yourself what exactly will happen if your stock gives up a portion, if not all, of its gains. Will you be financially ruined? Unless you've bet the farm, the answer is no.
As you consider these questions, bear in mind that a failed investment does not make you a failed investor.
Know yourself and move from there
You may ultimately decide that individual stocks cause you too much anxiety. This is a valid reason to take profits and move into an index or mutual fund. But for investors with well thought-out stock picks, diversified holdings, and long-term time horizons, price drops mean only a change in the number on a computer screen -- not the long-term viability of a business or investment thesis. In fact, we would argue that this presents an opportunity to add to a worthy investment at a discounted price.
Thanks for reading! After exploring Under Armour in more depth for this article, I am watching the company very closely. If the stock gets clobbered I will likely start a position.
David K [more]