Saturday, March 25, 2006

Continental Wine

There may still be good wine left at the Continental party.

Continental Airlines' (CAL) share price (SP) has increased 150% in the last six months. Wow! A bit late to consider getting into the game then? I am not so sure.

I have just done a back-of-an-envelope estimate to see where the SP could go by the end of the year. Given a 2007 EPS of $3 and a forward PE of 15 the SP could go to 45 by the end of the year for a 63% increase.

Then I did something interesting. Using the Q4 2005 report I changed the fuel expense to be the same as that in Q4 2004. Suddenly annual EPS was $8! I am not saying that the oil price is going to go below $50 this year but it just shows the sort of profits that are possible if the price plummeted.

Of course the opposite could happen - oil could go to $80, there could be another terrorist attack or a US recession. Any of these events would hit CAL hard. By owning airline shares I would be exposed to all sorts of negative possibilities. I would also be exposed to the possibility of the oil price decreasing slightly and none of the above catastrophes happening which would probably lead to a 100% gain by the end of 2006.

So am I tempted? Yes! But buying CAL would mean selling GOOG to raise the funds.

I think GOOG can end 2006 on a SP of $480 for a 31% increase. However I think the heady days of 2005 are behind us for a while. Out of all the rubbish printed about GOOG in the last few months one very important thing was said. George Reyes (the CFO)explained that the explosive growth in 2005 was due to an exercise to tweak the revenues from sponsored search, an exercise that is almost complete. Since sponsored search and Adsense are almost the sole sources of revenues, growth in 2006 should be more organic than explosive. This is factored into most analyst estimates but perhaps the potential for blow-out quarters is not there any more.

I will look into CAL more and no doubt make the wrong decision in the next week or so!

Saturday, March 18, 2006

Internet still falling

I posted a similar chart some weeks ago but this is not a chart you often see. The NASDAQ and DIA are climbing and the Internet bellwethers are falling. Normally the volatile Internet stocks climb faster than the indexes and fall quicker.

I know that GOOG and YHOO has specific reasons for some of their fall but eBay's last earnings release was perfectly respectable and it has still been caught up in the decline.

In fact the decline in eBay's PE ratio over the last few years has been quite startling. Through most of 2004 the trailing PE was over 100. Then came the crash of January 2005 which took the PE down to about 70. Now over one year after the crash the PE has decayed to 50.

So what is it with Internet stocks? Perhaps all the excitement over GOOG in the last year has put eBay in its shadow. Now GOOG is out of favour it has taken the market down with it.

An example of some of the rubbish that gets written about eBay is here. The analyst suggest waiting until Q4 2007 to look into eBay! Why? The analyst also suggests that the SP will be range bound through the summer. Why? He then mentions eBay's "premium" valuation but actually eBay is a lot cheaper than YHOO and half the price it was 18 months ago.

I would like to bet half my portfolio that eBay will trade outside the $35 - $45 range before the end of the summer!

These are tough times for Internet investors like me. But there have been tough times before and there will be again. When sentiment finally changes I will be laughing.

Friday, March 10, 2006

A story of two articles

In the space of two minutes I have just read two articles - one is the worst article I have seen for a long time and the other is the best.

The worst one is here. Another poor analyst has taken Yahoo's current PE of 24 at face value! Ha Ha Ha Ha! I am just an amateur buying shares as a hobby but it is just so obvious that a trailing PE that low for Yahoo is not indicative of anything. I am not even sure what caused it - it may have been the sale of their Google shares - but what is important is the earnings estimate for this year and the estimated growth rate, not some random trailing PE. Maybe I should look into moving into financial journalism - obviously you aren't expected to work very hard on your articles!

The best one is here. I have never heard of David Nassar but his advice on how he built up a position in eBay recently is fantastic. For example build your position slowly so that you can take advantage of further weakness. And accepting that you could be wrong and selling at a loss if necessary. Now there is the wisdom of an experienced trader.

Thursday, March 09, 2006

Stop Whining

I have made a resolution: stop whining about share prices!

Share prices fluctuate, often for no good reason, and this is just life on the stock market. Yesterday the traders got hold of eBay and chucked it around like a tennis ball. The financial media struggle to explain such moves - Reuters was the only one to make an attempt, and a desperate one here. The fact is that share price movements cannot always be explained by recent news. What about if someone who has £100 million of eBay decides to retire and move his portfolio into bonds? What about if some top-down fund manager decides to rotate out of Internet stocks? Or it could just be traders having some fun.

As a very small investor I am riding the waves created by other people. I just buy into fantastic companies at what I think is a good price and hope to sell at a profit one day. I still maintain that eBay was good value at $44. At $38 it is even better value but that still might not be the bottom of this little dip.

If I end up with a large paper loss then that is my fault for not having a specific stop loss policy. It is no good investing in a volatile stock and then whining about its volatility.

eBay will be fine. Even if it isn't I will be fine. There are bigger things that can go wrong than the eBay share price!

Tuesday, March 07, 2006

CSR still a bargain

CSR has now recovered all its SP losses after the preliminary results were published and is now back where it started! And it is still a very obvious bargain!

Here is the deal: 2006 revenue growth of over 90%. 2006 PE of 20.

The is based on an EPS of 60p for 2006 which is not an optimistic estimate.

Why is the price so cheap? Here are some ideas:

- SP has already tripled since last summer. Psychologically it is hard to buy shares that have already had an amazing run.
- Texas Instruments and Broadcom are competitors. Investors assume that the US giants are going to gobble up the Bluetooth market sooner or later.
- Financial websites have incorrect data. CSR reports in dollars which seems to confuse the financial websites. For example III has 2005 eps as 0.67p rather than $0.67. The difference is rather substantial!
- Bluetooth not well understood. Unless you have used Bluetooth yourself you may not realise its potential and just assume it is a technological fad that is going to be replaced by something else soon.

Here is another important nugget: In 2005 CSR won 60% of all Bluetooth design wins. That means it current 50% market share is not going to dwindle any time soon.

CSR has about the best risk / reward ratio I can find at the moment.

This one is still a buy and I will be averaging up when I have the opportunity.