Rules should be broken

What did I say about not buying any more Vodafone?

On Thursday I did just that! Out when BAA (made just 3% on that one) and I doubled up on Vodafone, bringing my average purchase price down to 137p.

I have now broken one of the rules of this portfolio as I have over 25% tied up in one company. Why did I do this? I just couldn't bear the thought of watching VOD crawl back up to 140p in the constant knowledge that I had missed a very easy quick 5%.

I believe that the downside from 128p is very limited whereas Arun just needs to work his charms on the investment industry for a few months to bring the share price back to its previous levels.

Vodafone is a great company. Revenue growth is slow but this cash cow is as solid as a rock. Communication is a basic human need and until that need disappears Vodafone is going to keep generating cash.

Now sit back and watch this oil tanker turn North.

Vodafone Carnage

It is hard to believe that a company of Vodafone's calibre can drop over 10% in one day but that is precisely what happened today. Aaaggh! Was the interim report really that bad? Revenue growth is slow and margins are decreasing but investors knew that anyway. More dividend and less share buy backs would be nice but then Vodafone like the buy backs because if necessary they can stop them to fund a big aquisition wheras they can't lower the dividends without a big backlash.

Either way investors were not impressed with a 15% dividend rise and over 2 billion shares changed hands in a huge institutional sell off. Maybe some investors have lost patience with the static share price. It is now once again lower than the price I first bought it at almost two years ago.

I guess this could be seen as a buying opportunity but I have not had much success this year with catching falling knives and I already have a big stake in VOD so I will stay out. I will probably be a slow hike back to 150p but I will have to be patient and wait for a chance to sell this underperformer.

It is impossible not to like the amount of cash that Vodafone generates but growth is slow and competition is high so I will reduce my position when I get the chance.

eBay, Google and greed

It has been a good couple of weeks for the eBay share price (SP.) After the quarterly earnings release on Oct 20th the SP plummeted to $38 but in the last two weeks it has climbed back up to $44. The annoying thing is that I am not sure why! This is the problem with observing the market from a distance (about 3000 miles to be precise!) I remember a scary week in April when the SP dropped like a stone for about a week for no obvious reason. Now it is doing to opposite. I did read a report that currently the number of listings is beating expectations. Sentiment is improving anyway and that has to be a good thing.

My aggressive portfolio is composed mainly of Google and eBay. Google has been a fantastic holding for me this year - I have managed to capture a rise of almost %100 over two periods of holding this one. The eBay SP has only just turned into a profit on my buy price back in January. However, given a choice between the two on a share to buy and hold for ten years I would choose eBay. Most of Google's revenue comes from advertising and I am slightly uncomfortable with that. Here are some reasons:

1. Advertising budgets are one of the first things to get hit in a recession.
2. Yahoo, Microsoft, IAC and others are all going for a slice of the same pie. There is only so much advertising money to go around.
3. Selling advertising means you are selling to businesses rather than consumers. eBay's revenue comes from businesses and consumers and that gives them more growth opportunities.

Of course Google is going to try to start getting revenue from consumers one day. But the idea of regularly getting an invoice from Google seems a long way off to me.

So Google has been the success story this year (in terms of SP) but eBay is my favourite holding by a long way. With a trailing P/E of 60 eBay does seem risky. But this is a company that is growing at 40%, would do fine in a recession and has no real competitors in most of its markets. How many companies like that do you find?

This brings my thought processes to a final conclusion: should a large portion of my mortgage portfolio go into eBay?

My mortgage portfolio is currently invested in British blue chips, with up to 25% in US blue chips. But the British blue chips are so slow! Vodafone's SP is about 5% above what it was almost 2 years ago when I first bought it. That is a major market underperformance. Maybe the SP will jump up if larger dividends are announced in the interim report next week but I am getting impatient with VOD (again!) Tesco is down 3% on my purchase price in the summer, BAA is up 3% and Royal Bank of Scotland is flat. The real gains have been in the US blue chips. I made a quick 15% on Motorola and have recently made a quick 8% on Microsoft.

So nearly all my success is coming from the other side of the Atlantic. There seem to be so many high growth companies over there. The few decent ones on this side (like ARM) are over-priced because of the lack of alternatives for UK investors. So maybe I should adjust the rules of the portfolio to allow a portion of it to be in high growth US companies. Is this falling into the greed trap? Or is it just common sense for a portfolio that has almost 20 years to run?

I am inclined to think it is the latter.

So here are the new rules for this portfolio:

Blue chip means: trailing P/E less than 30, market cap. over £2 billion, yield over 1% and non-cyclical.

1. At least 50% in British blue chips.
2. Up to 25% in foreign blue chips.
3. Up to 25% in high growth companies.

As I have said before, the great thing about having maximum allocation ratios is that if one of your holdings doubles you are forced to take some of the profits. This would have meant avoiding some of the market downside in a situation like the dot com bubble burst.

So I have convinced myself: the mortgage portfolio needs to be more aggressive. Yippee! It is nice when you are managed by yourself!

Go Nasdaq Go!

October was a dreary month indeed but the last day almost made up for 30 days of torture. The Nasdaq was up 1.5% but my internet-heavy growth portfolio was up over 3.5%!

It is not often that you get days like this on the stock market so I am sitting back and savouring the victory. I am not sure exactly why the internet stocks were favoured but "TheStreet.com" did publish an article about some deep internet value around at the moment, citing Verisign as one of the examples, which helped them to a 4% gain.

Google is already up 15% since I bought in again. I am not selling though. It seems to me that people assume that because of Google's amazing run in the last year it must be over-valued. Then they compare the market cap. to other companies who have been around for a long time and have more revenue that Google. Then they look at competition from Microsoft and Yahoo and say Google is worth about $200 a share. As far as I am concerned you only need to look at two metrics to get Google's share price - earnings and growth rate. A very conservative earnings estimate for 2006 is $8. A conservative growth rate is 40%. 8 * 40 = $320. Current price = £370. Obviously investors expect over $8 a share next year. The point is that just because a share costs $370 does not automatically make it expensive. Just because a share has quadrupled in a year does not automatically make it expensive. Google is on a forward P/E of 44 compared to 48 for Yahoo. And which one is growing quicker?

I know that Google cannot always grow at 40% but I don't think the growth will slow below 20% in the next 5 years either.

eBay, Google and Verisign all look well placed for further share price appreciation. Go Nasdaq Go!