The eBay reward

eBay is cheap; too cheap.

An important concept in investing is the risk reward ratio. Normally to have the chance of gaining more you have to risk more. If you want the chance to make £1 million from £1 then you need to play the lottery, with every chance that you will lose all you £1. If you are happy to make a risk-free 5% on your capital every year then a saving account is for you. Most other forms of investment lie in between these extremes.

Sometimes a situation crops up where the risk reward ratio is in the investors favour. This might be a situation where the worst case scenario is break even after 12 months and the best case is 50% gain. This is the case with eBay at $43.45.

eBay's trailing PE is currently 56. This is cheap by eBay standards; in the dark days of May last year is dropped to 50. In the bubble days of late 2004 it was well above 100.

eBay is forecast to earn about $1 per share in 2006. So lets look at three scenarios.

1) Everything goes as forecast. EPS of $1. Trailing PE of 55(as now.) Share price = $55. Growth = 26%

2) Everything goes fantastically well. EPS of $1.10. Trailing PE of 65. Share price = 71.5. Growth = 64%

3) Everything disappoints. EPS of $0.90. Trailing PE of 45. Share price = 40.5. Growth = -7%.

So the worst is a small loss and the best is 64% growth. I will take those sort of odds! eBay is uniquely low risk because of its lack of direct competition and the power of its user community. eBay is becoming part of the language. Buying on eBay is fun. Analysts don't talk about that point but it is important. Buying on classified listing sites is not fun - at present anyway. There is no community.

The upshot of all this is that today I will be betting my mortgage on eBay. Well not quite but almost. I will be selling Microsoft for a small gain (about 5% probably - should have sold at $28!) I will be plowing the proceeds into eBay. I am tired of my mortgage portfolio containing slow-growing blue chips. They are supposed to be low risk but Vodafone is down over 20% from its highs of last summer. Dividends are nice but 30% earnings growth is better.

I still think some level of diversification is important so I will not put all my mortgage portfolio into eBay, only 25% of it. After all I may be wrong in my judgment. Do your own research.

Ouch!

What a week! Sometimes the stock market can be boring and sometimes it can be a rollercoaster. Last week was definitely the latter.

It wasn't looking so bad on Thursday. eBay had climbed 6% after a very solid earnings release and my growth portfolio was at an all time high. How that changed on Friday with my tech-oriented growth portfolio plummeting 3.5%!

Things were much worse with my mortgage with Vodafone finding depths it hadn't known for 18 months. My decision in November to average down is now looking a bit unfortunate.

I would be a liar if I said I was not worried about Vodafone (especially as it is my biggest holding) but I expect to see 140p again this year, which would put me back into profit. Key performance indicators come out on Tuesday and it seems to me that any bad news is already priced in so I expect either a big jump or an unchanged SP.

I think Friday's fall has resulted in a few great buying opportunities; obviously Vodafone and Google looks good value at $400. Unfortunately I never leave spare cash lying around in my broker accounts so I won't be taking advantage. I could always sell a holding that has held its value (like CSR) to buy into one that hasn't (like Google or Yahoo) but I have not had much luck in the last 12 months buying after a fall.

I have heard the stock market described as a bucking bronco, trying to shake off fearful holders. Vodafone's performance over the last couple of weeks is certainly reminiscent of a bronco, but I will be holding on for dear life.

Intel miss

I have been looking to get into Intel recently but have been waiting for my Microsoft shares to reach the right sell price ($28 would be nice.) I am glad that I waited: last night Intel missed expectations quite thoroughly and the stock is down almost 10%. To quote one of the misses, revenue was $10.2 billion rather than $10.5 billion.

So is this a buying opportunity? Ha ha probably not judging by my luck with buying after a bad report with eBay, Verisign and Vodafone. They all remained well below my buy price for at least 2 months.

Fundamentals do start to look attractive with the SP at $23 though - a forward PE of 14 is quite hard to find for a company of the quality of Intel. The yield will now be closer to 2% than 1% and share buybacks continue.

However forecast revenue growth of 6 to 9% for 2006 is disappointing, especially when analysts are forecasting 15% growth for the next 5 years.

Intel deserves more analysis. My rule now is to wait at least 2 weeks before buying after a bad earnings. This should allow the SP to finish the bulk of its re-adjustment.

AMD and TI will probably go down in sympathy to INTC and the real opportunity may be there.

Underperformance

I hate to admit it but my mortgage portfolio is underperforming. It is up about 3% in 6 months compared to a 10% rise in the FTSE100. Ooops.

A large portion of the blame goes to Vodafone. The share price is taking longer than I thought to recover to its pre-November levels. Despite a nice rise to 132p last Friday it was unable to retain that level and a disappointing report from France Telecom on Thursday sent the SP back down to the mid 120s.

Vodafone was also downgraded to "underperform" by one broker. Well as the tons of broker recomendations last year didn't help the SP hopefully this downgrade will be ignored as well.

With 35% of the portfolio invested up in Vodafone, its performance this year will determined largely by the efforts of Sarin and co. Oh dear. I have been here before. In 2004 50% of my growth portfolio was in Vodafone. As the Vodafone SP went nowhere in 2004, so did the portfolio.

Should I invest all my mortgage portfolio in the FTSE100 ETF? Possibly but that would be soooo boring. I would rather have some defeats and victories on the way and learn more about investing in the process.

Vodafone Key Performance Indicators are out on the 24th Jan. Lets hope for some good news!

Portfolio Update

As it is New Year I will have a quick look at the constituents of my growth porfolio.

1. CSR

CSR are the most interesting UK company I discovered in 2005. The market for their Bluetooth chips is growing rapidly and CSR are maintaining their position as leaders. I estimate they can earn 70p a share in 2006 putting them on a forward PE of 14. This is too low for a company growing at the speed of CSR. I would buy this one all the way up to 1400p.

2. eBay

eBay are my biggest holding and my favourite company. The have the best business model know to man. 2005 was a bad year for the eBay share price (SP). Although I managed to avoid the SP crash in January I bought in too soon and managed to capture another 20% drop in the SP. However the SP recovered somewhat in the second half and is now showing a modest profit. Sentiment on eBay is gradually improving and analysts are once again talking about $60 price targets. I am holding this one until investors get carried away again like they did at the end of 2004.

3. Google

Google was responsible for a large amount of my portfolio's growth in 2005. The SP more than doubled but I still think it has some way to go. The $600 price target slapped on it recently is realistic in my opinion and I will be holding for now. However I do not see it doubling again in 2006.

4. Rolls Royce

RR had an amazing 2005, increasing by over 60%! Unfortunately I only had a small holding so the impact to my portfolio was minimal. However I am going to carry on buying into RR so that by the end of the year my holding should be significant.

5. Verisign

$!$?$!? This is not a secret code but represents my feelings on the VRSN SP at the moment. It was obviously impetuous of me to buy in without knowing more about the business. I suspect that the Jamba! business has more or less decayed away to nothing and so the SP has slipped back to 2004 levels. I still think VRSN will be fine long term and so will hold on until I can sell at a small profit.