Wednesday, March 30, 2005

eBay prediction

I am well aware of the fallacy of making predictions about the future. But I am going to make one anyway!

The eBay share price will never close again as low as it did on the 18th March 2005.

On that day it closed at $35.01. This was an artificial low caused by the S&P500 changing the weighting of eBay in their index, forcing all the index trackers to sell a portion of their eBay shares. There is massive support for eBay at this level, displayed the next market day when the share price rocketed up to well above $36.

eBay has fallen enough now. The share price is gathering breath before the next hike upwards (market permitting of course.) If you want to get in at a good price, now is the time. Quarterly earnings excitement is just around the corner. Don't say I didn't warn you.

Paid Search to Oil Tankers

While playing with the Yahoo! stock screener yesterday I did a search for companies with high yields. One of the first things I noticed in the results was a company that yielded 28%!

Frontline Ltd is a Bermuda registered company involved in the ownership and operation of oil tankers. The high demand for oil tankers last year led to revenues growing by 60%. When FRO make money they return most of it to the shareholders, hence the sky high dividend yield last year.

Is the high yield also due to the share price being hammered? Not really. The share price at $46 is well below the December 04 high of $64 but actually has risen very nicely since late 2002 in line with improving market conditions.

FRO is in a cyclical market and most analysts obviously think the market has reached the top of its cycle, hence the P/E of less than 4! The market hates uncertainty and FRO’s dividend fluctuates as much as most companies’ share price as their profit fluctuates depending on what daily rate they can get for their tankers.

For their big tankers they need to charge about $25000 a day to break even. Last year they were charging over $60000 a day! This leaves quite a lot of room for market deterioration.

Am I tempted? Most definitely! I think all the risks are more than priced into this stock. I don’t believe crude oil demand is going to decrease any time soon. The availability of oil tankers is only going to increase slowly as these things can’t be built overnight. And all of the single hull tankers are being phased out as they will be banned by 2015, helping maintain the global shortage. The huge dividends show no sign of ending at present. At the current rate the shares could pay for themselves in 4 years!

The share price appears to be in free fall at the moment so I will wait until it stabilises, take a deep breath and maybe plunge in.

Wednesday, March 23, 2005

ASKJ going cheap

So IAC are buying Ask Jeeves and my shares are up almost 20% and I have only owned them for a couple of weeks. 20% in a few weeks? I must be happy right! Well yes and no. Obviously 20% in a few weeks is a fantastic performance but I think the shares are worth more than IAC are paying for them. Couldn't ASKJ have got a better price? I think IAC need them more than they need IAC. I was becoming increasingly fond of ASKJ's little corner of the Internet and had high hopes for my shares. I didn't think getting back to $40 in the next year was impossible. Now they will be stuck around $28 until the transaction completes. Then I have the choice of buying into IAC or looking elsewhere.

Rather than be stuck with a static share price for the next 4 or 5 months I will sell the shares in the next few days when the price is right.

That then leaves me with the pleasant choice of where I allocate the capital. IAC is an option of course but I am not a big fan of holding companies. I know that IAC has a nice portfolio of Internet companies but the synergies aren't all the obvious in my opinion. I think Barry Diller has too many eggs in his basket and I don't really see his point. He seems to love making deals more than making a particular vision successful. I see the future spinning out of the travel groups into Expedia as positive but for now I will just keep an eye on IAC.

I am quite tempted to put the money into eBay and I think financially that may be the best choice but that will leave me only invested in 3 companies in my growth portfolio, limiting the educational opportunities.

Yahoo looks like a good choice. I love the company's strong brand and quality web sites. Their financial site is the best I have found. The information is presented cleanly and the adverts are not obtrusive. They are also in the online auction business in Japan and China - a business I love! Most of their revenue comes from advertising which is a bit scary as advertising is one of the first industries to be hit in a recession, but there seems to be a lot of momentum behind Internet advertising at the moment.

We will see. But for now it is a fond farewell to ASKJ.

Friday, March 18, 2005

The eBay Slide

My eBay ramp (see earlier article) is becoming an eBay slide! The share price is at an 11 month low now – 40 % below its highs in December. It just goes to show that when a company is priced on multiples of over 100 so much of that price is emotion and so little is analysis.

Let me list what I think are the reasons for the share price dive:

- Earnings guidance missing expectations
- Price increases creating bad feeling
- US competition in the form of Overstock
- Meg Whitman interviewing for the Disney CEO post
- The recent court case involving the MercExchange Patent
- eBay’s vulnerability to "phishing" scams

The first reason is the most valid one. When you are on sky high multiples you are expecting 40% growth well into the future. Any sign of a growth slow down and the stock gets hammered. I would say this possibly justifies a 20% share price decrease.

The second point is purely emotional. Pricing is a black art. Don’t think that eBay have made this decision lightly – they probably have a team of pricing experts. Increasing the prices maximises the profit from core users who won’t leave at the expense of possibly losing some of the light users. Whether is will help earnings significantly remains to be seen but unless you are a pricing expert this is not a reason to doubt the company.

The competition with Overstock is really not such a bid deal. When you have such a fantastic business model as eBay does you must expect competition. If it wasn’t Overstock it would be someone else. Competition is healthy and Meg Whitman professes that she loves it. eBay investors need to accept that competition is part of life. eBay is best placed to win.

Meg Whitman interviewing for Disney does not worry me. Who in their right mind would turn down an interview for such a post? Meg is a free woman and I don’t blame her for considering her options. She chose eBay in the end anyway.

The recent court case is just a storm in a teacup as far as I am concerned. There may be a small fine for eBay to pay but I don’t see this having long term repercussions.

The "phishing" vulnerability is nothing new. This is the sort of thing that analysts talk about when they are trying to find reasons for the share price drop. eBay have a big team of security experts working on this constantly – the danger will not go away but it is being monitored and addressed.

So there we have it – the news maybe justifies a 20% share price drop but not 40%. Articles like this recent one in the Motley Fool make me laugh – the author states that he wishes he had bought eBay over a year ago when it was cheap, so he could have made a fortune last year. However now it is cheap again he is not going to buy it for a number of wooly, emotional reasons. Ha ha ha, that is not how to be a successful investor. To be really successful you have to be bold and buy when everyone else has sold.

My time is up. Be brave and buy eBay.

Sunday, March 13, 2005

Risk - part 2

One thing that annoys me is when respected investors preach that you must have a well diversified portfolio. It is often recommended that the private investor own stakes in at least 20 different companies so that if one share price plummets the portfolio is not decimated. What the sages never say is that if one share price takes off and doubles in six months the effect on your portfolio is also minimised.

Everyone knows that the more you risk you take the more chance you have of growth. So surely the advice should be: if you want less risk diversify more, but accept that your potential growth (and loss) is less.

There are some risks I will not take. Borrowing money to invest is one of them. Investing a large portion of my portfolio in a company like Delta Airlines that may go bankrupt is another. But split my portfolio between 3 or 4 fantastic, profit-making companies that are already on high multiples? You bet!

I think the ideal situation for me is to have 3 to 6 companies that are attractive enough for me to invest in. Hopefully at any one time one of them will be at an attractive price and can lap up surplus money. At the moment I think Ask Jeeves, eBay and Vodafone are all attractively priced. All I need now is some surplus money!

Happy investing.

Thursday, March 10, 2005

US shares are us

The proceeds of my Vodafone sale finally cleared into my US-capable account on Tuesday and I bought into eBay and Ask Jeeves. I just couldn’t get excited about buying into Barclays. They seem to have good prospects but I couldn’t really say I understand a great deal about banking and there are more aggressive opportunities out there.

Once such opportunity is Ask Jeeves. Ask Jeeves run an Internet Search Engine – at and A Google competitor! The fact that ASKJ competes with GOOG has driven the share price down to an almost unbelievable level for an Internet growth stock. The trailing P/E is 29, the forward P/E is 14 and the growth rate is 25%! Negative fundamentals include almost 20% of the shares sold short and a smaller cash pile than many Internet stocks. The current share price at $23 looks like a fantastic opportunity to me and I have put my money where my mouth is with a purchase of 66 shares.

I also bought another 45 shares of eBay. I have explained before why I like eBay so much. There is a certain amount of negative sentiment surrounding eBay at the moment and it is driving the share price down, creating a buying opportunity. Some of the negative sentiment is valid but most of it is rubbish. For example people talk about the fact that some store owners have found it cheaper to setup their own website and buy keywords from Google rather than using an eBay store. This may be so but how many people know how to create there own website? How many people know how to create a database to hold their inventory details and order details? How many people know how to link the website to the database? How many people know how to buy keywords off Google? I’m sure that there are solutions out there that make this easier but I really don’t see Google as a direct competitor to eBay at the moment.

Anyway the deed has been done. eBay now occupies about 40% of my portfolio and I am well placed to profit from any return to positive sentiment by the market. The share price has fallen quite heavily since I bought more shares on Tuesday but that is par for the course!

Till next time.

Thursday, March 03, 2005

140 and out

Vodafone crawled up to 140p yesterday and I sold. I now have the pleasant task of allocating the capital made available. The current plan is to invest half the capital in eBay and split the other half between Barclays and Big Yellow Group. Having sold VOD I currently have no investment in UK companies apart from some Vodafone shares in my son’s college fund. This is not a healthy situation in light of the continuing dollar weakness so I will resist the temptation to put all the money in attractive US companies.

The Barclays share price has plummeted recently, creating a buying opportunity. The P/E is currently at 11 and the yield is over 4%. This seems like good value for a company with reasonably growth prospects and some takeover prospects. I don’t expect great things for the share price but they should provide a solid backbone to what is becoming an aggressive portfolio.

My Sharebuilder account will invest £500 in BYG in a few days. I will put another £500 in from the VOD sale and then use the account to buy into Barclays. The problem with the Sharebuilder concept is that if you are regularly investing small sums into a company and the share price rockets (or plummets) after only a few months and you need to sell, then the selling fee will be a huge percentage of the transaction. Halifax does mitigate this slightly by only charging £5 when you sell less than £250 worth of share. However to avoid having to sell small bundles of shares, if I am going to invest small amounts on a monthly basis I only buy into large, low risk companies where I know I can keep buying for at least a year and nothing catastrophic is likely to happen. If I want to buy a more risky stock like an airline I buy a big chunk all at once.