Sunday, September 14, 2014

Alibaba, Investment Gold or Expensive Flop?



             The stock market has been acting much like a roller coaster this past summer with the Dow gaining a little over 200 points since the last time I posted June 29th. With that said there has been a large over 600 point sell off in late July but stocks have since bounced back, and continue to climb ever higher. Investors have had a lot to digest this summer and early fall, with tensions with Russia heating up again in light of the new sanctions, the winding down of the war in Gaza, and America’s new involvement in Iraq and ISIS. Even Scotland’s new referendum to secede from Britain has had its effect on the market. But one thing has definitely  kept Wall Street’s eye throughout the summer and for months before that, the most anticipated and largest IPO of all time, the Chinese ecommerce giant Alibaba. 
                Any person who has even glanced at the financial news over the last several months has heard of Alibaba. Jack Ma’s internet startup that has become one of the largest ecommerce giants in China and hence forth the world and now is having its market debut on the New York Stock Exchange. For those of you unfamiliar with it Alibaba is China’s equivalent of Amazon, EBay and PayPal rolled into one, the primary difference is Alibaba is larger than both Amazon and EBay combined with over 279 million active buyers and 8.5 million active sellers in the first 6 months of 2014.
                Everybody knows that China has the potential to become the largest consumer market in the world but American companies have been struggling for years to break into the heavily regulated market. Chinese companies such as Baidu, Tencent Holdings and off course Alibaba have taken advantage of Wall Street’s thirst to get into the Chinese consumer market by having there IPO’s in New York as opposed to Hong Kong. But honestly, I know you do not particularly care about that what you want to know is if Alibaba is a good addition to your stock portfolio and how will the stock perform.
                Obviously I am not the first one to write about Alibaba and I am sure I will not be the last but with the IPO only a week away I believe it is a good time to give my opinion on this new internet giant.
                The first thing investors need to know about Alibaba and its IPO is that this is not a Chinese version of the Facebook or Google IPO. Those companies went public as mere startups and grew into internet giants and corporate empires. Alibaba is already established, the company is unlikely to double its stock price on the first day the way Twitter nearly did when it went public last year.   
                With that said the hype around Alibaba has been intense, and it has been confirmed that nearly 40 institutional investors have already requested up to $1 billion in Alibaba stock each. With this hype it is unlikely that retail investors would be able to get their hands on the stock at anywhere near the initial price of $60-66. So the billion dollar question is whether Alibaba stock is priced low enough to be good buy and at what price will the stock become too expensive in terms of evaluation.
                To answer that question we must go through Alibaba’s financials and see if the numbers add up. Alibaba reported profit of $2.3 billion in the first 6 months of 2014 and revenue of $8.5 billion last year, those numbers are growing considering Alibaba’s profit jumped 43% in just 1 year. Estimates for 2015 show that profit for that full year will jump to $7 billion and that revenue will continue to climb 30% per year which would mean that by 2016 Alibaba would be producing about $20 billion in revenue.
                That kind of earnings growth would put Alibaba ahead of American internet giants like Amazon and Google. But these numbers are also estimates and if investors know anything it is that estimating anything on Wall Street is futile. With that said however these are the most accurate numbers investors have to go by in order to make a decision about whether or not to invest in Alibaba so lets make the best of it.
                If these numbers are accurate Alibaba will go public at a P/E ratio of about 24x 2015 expected earnings. Now that is not bad at all, I would not call that cheap per say but when compared to other companies in the industry it exceedingly average. (Below is a chart created by the Wall Street Journal comparing Alibaba’s evaluation to other American and Chinese internet companies)
Amazon- 71x 
Facebook- 35x
Tencent- 29x
Baidu- 25x
Alibaba- 24x 
Google- 19x
EBay- 15x
(2015 P/E Ratios for estimated 2015 net income)
               
              As you see in the chart above Alibaba is not exactly cheap, but with earnings potential being almost limitless considering the fact China might become the largest consumer market in the world by far, it is possible that Alibaba warrants the price tag given to it at its IPO. Unfortunately like I said before it is unlikely that retail investors will be able to the stock at anywhere near $60-66 a share but is the stock stays below $80 I would still consider it a good investment.
                To summarize Alibaba’s $24 billion IPO could be an amazing opportunity to get in on the growing Chinese consumer market. Even with the potential problems in the future such as increased competition from other Chinese and American internet companies as well as the problems of breaking into the U.S market the opportunity Alibaba presents is unprecedented. My recommendation would be to make room in your portfolio for this stock immediately so that on Friday when it goes public you could one of the first to buy.



IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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Sunday, June 29, 2014

Is American Apparel and its Competitors Doomed?


               Apparently investors are writing off the continuing crises in Ukraine and Iraq along with Argentina’s debt problem as just mild inconveniences since all the major indexes ended the week with solid gains. But one person is definitely not smiling, Dov Charney, you might know him as the man who founded American Apparel in 1998, or as the controversial C.E.O who has a history of sexually harassing employees, but this week he is known as the man who was fired from the company he started 16 years ago.

                Whatever the drama behind the ouster, the recent firing of American Apparel’s C.E.O and founder has led many on Wall Street to notice the recent struggles at American Apparel and other casual clothing stores. Alright, I know “struggles” is an understatement if there ever was one, but with all the media attention on American Apparel I figured it would be a good idea to analyze the company and its competitors and see if there was a potential buying opportunity because of cheap prices or at the very least, a shorting opportunity.  

                What truly shocked me during my research is just how low shares of American Apparel and some of its competitors including Aeropostale had fallen. As of Friday stock in American Apparel is at just $.97, that’s shocking considering the stock was at $15 in 2007. The question now becomes can the struggling retailer, which has not made a profit since 2009, make a comeback?

                First of all lets address the companies evaluation, which acts as an indicator if the company has the potential to see its stock bounce back or see if it makes sense for the company to be bought out by a 3rd party.  By taking a quick look at American Apparel’s 1st Quarter earnings report for 2014 it is obvious to me and to any value investor that American Apparel has no hope of seeing its stock bounce back.

                A simple way of demonstrating this is by looking at the true value of American Apparel, by true value I mean the value shareholders will receive in case the company is liquidated. A simple way of finding the true value of a company is by subtracting the company’s total assets from its liabilities. The closer the company’s market cap is to the company’s true value the better. In the case of American Apparel the true value is negative $53.672 million. As of Friday American Apparel’s market cap stands at $167.6 million.

                The company’s deficit makes it highly unlikely the stock will bounce back at all, but the recent ouster of its controversial founder did give some investors hope that American Apparel, which does have some brand recognition amongst 19-30 year olds, might get bought out by a 3rd party such as Urban Outfitters or Abercrombie & Fitch. Personally I feel that such a buyout is highly unlikely, not just because Co-chairman Allan Mayer said that “the company was not pursuing a transaction and has no plans to put its self-up for sale”. But also because American Apparel’s balance sheet has no hidden jewels that would make an acquisition worth it and the stock does not trade for less than the sum of its parts (which is something buyers tend to look at).

                With all this evidence I feel confident saying that American Apparel will probably be forced to declare bankruptcy within the next few years. The only thing shareholders in the company can hope for is that ousted founder Dov Charney, who still owns nearly 27% of the company will assemble a consortium and buy back his company. Unfortunately that appears to be a forlorn hope since the board has recently taken steps to protect the company from any take over attempt by Charney. Worse still the battle between the ousted founder and his company has shifted to the court house, where Charney will attempt to sue American Apparel for smearing his name and wrongfully firing him from his position. Whatever the outcome of the suit American Apparel will have to spend millions in legal fees, millions that the company does not have. It appears that Charney could take revenge on his board by uing the company within an inch of bankruptcy (unfortunately the company is already within an inch of bankruptcy so that is kind of a bad pun). However with that said be wary of shorting this stock, as a penny stock American Apparel has become rather volatile so I would stay away from this company altogether.

American Apparel seems to be doomed are its rivals also destined for the same fate? Stocks of other casual retailers like Aeropostale and American eagle have been under pressure recently as sales slump do to changing fashions. But other competitors such as Abercrombie & Fitch have actually seen their stocks rally somewhat in 2014. So what is the future of these retailers?

                The first retailers that came to mind after doing some digging into American Apparel were Aeropostale and American eagle. Both companies have seen their stocks fall sharply in 2014 (American eagle is down nearly 20% year to date while Aeropostale stock is off over 63%). Aeropostale is almost at the level of American Apparel, with its own stock trading at just $3.55.

                Unfortunately for Aeropostale there does not seem to be any hope on the horizon, the company trades at a true value of $207.97 million and with a market cap of $279.2 million. The company has been losing money for 5 quarters straight and has been encouraged to either go private or sell itself to a competitor. The company has recently been closing up to 70 stores in order to lower expenses but this might be too little too late. It appears that with just $24.5 million in cash and with an expected loss of over $50 million coming in the 2nd quarter of 2014 it might appear that Aeropostale is doomed to the same fate as American Apparel.

                American eagle on the other hand is in slightly better shape, shares in this popular teen clothing store currently trade at over $11, and unlike American Apparel or Aeropostale the company is actually profitable. Since American Eagle brings in revenue of over $3 billion, and has so far been able to remain profitable I feel that this retailer will survive. With that said buying the stock is a risk move because the trend has so far been negative and the stocks volatility is high.

                While American Eagle adapts to the new fashion environment another competitor in the industry is actually seeing its stock rally in 2014. Abercrombie & Fitch stock is up over 30% year to date as the analysts say the company is a ripe takeover target. Whether that’s true is a different question entirely.  Personally I would stay away from this stock, even if an outside company does buy Abercrombie it is unlikely to do so at a high premium, and with slim margins and a constantly changing fashion market I do not believe this company’s stock could keep its current levels if a buyout does not occur.

                However you look at it he apparel retail industry appears to be a dangerous proposition for an investor. With companies like American Apparel and Aeropostale barely fending off bankruptcy and competitors like American Eagle and Abercrombie barely being able to adjust I do not think any investor should invest in this industry.           
 
 
 IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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Tuesday, June 17, 2014

Is the Party Over for Airline Stocks?


               It has been wild week on the market, with Apple stock splitting 7 to 1, a new crisis in Iraq and spiking oil prices. If that is not enough Europe now appears to be thinking about raising interest rates before the year is out. The culmination of these events resulted in a triple digit sell off on Wednesday and Thursday. Now this particular blog could be on any number of those topics, I could go into detail on how our President refuses to deal with the crisis with the Al Qaeda in Iraq. I am not going to do that though, instead I will address the selloff that occurred in an industry I have been bullish on for over a year, the Airlines.

                For people who have been following airline stocks recently you know that the industry is in the middle of one of the greatest turn round’s in business history. Airline stocks were amongst the best performers last year, impressive considering that last year was a record breaking year for stocks.

                The airlines are recovering from the chaos of the 1990’s and early 2000’s where almost every major airline in the U.S went bankrupt, including former industry leaders like Pan Am and TWA. Since then airlines have begun to consolidate, with the smaller weaker companies going out of business and the larger somewhat stronger companies merging out of necessity.

                The effect of this consolidation is the U.S Airline industry being controlled by just 3 or 4 large players, American Airlines (just fresh off its merger with U.S Airways last year), United (also a product of a merger with Continental in 2010, Delta Airlines (in my opinion the strongest airline and also created when Delta bought Northwest airlines), and to a lesser degree Southwest Airlines.

                This consolidation in the airline industry has led to higher prices for airfare which means higher margins which adds up to higher profits and stability which has not been seen in the industry since its deregulation in the 70’s. Under these new conditions the airlines have flourished and have rewarded shareholders handsomely.

                Now that you have some background on the industry the question is, why am I writing this? The answer is that the airlines have fallen victim to a large and in my opinion somewhat unwarranted sell off this week. Yes airline stocks that have gained over 50% in the last 6 months fell upwards of 5-7% last week. Ok I am lying the selloff was not entirely unwarranted.  On Wednesday the primary German Carrier, Lufthansa, announced an earnings warning saying that profits for 2014 might be as much as 33% lower.

                Wait lets step back a moment, I thought that the Airlines were flourishing? In fact European airlines are facing significant challenges (As was highlighted by Lufthansa). The German airline, with a market cap of over $12 billion, stated that increased competition from Gulf Carriers, labor union strikes, adverse currency effects, and unexpectedly weak revenue growth in its passenger and cargo businesses, all contributed to Lufthansa’s troubles.

                After the warning came out shares of Lufthansa fell 15% (understandable considering shareholders have just found out that the airline is expected to make just $1.35 billion for 2014, instead of the previously estimated $2 billion) Unfortunately for the rest of Europe’s Airlines the concerns stated by Lufthansa also pose a problem for the rest of them. Shares of International Consolidated Airlines Group (parent company of British Airways) and Air France immediately headed lower as there German counterpart announced that competition from low fare airlines and larger competitors in the Gulf was cutting into margins.

                Oh no, this is exactly what destroyed the Airlines before, extreme competition and price wars coupled with union labor troubles.  Apparently Europe’s Airline industry is going through what the U.S based industry went through during the late 20th century. Normally I would not really care about what Europe’s airlines had to go through, since I am mostly invested in American airlines (specifically Delta, Southwest and Spirit) but the sell-off of European airline stocks quickly spread to the U.S. Major carriers in the U.S were all down on Wednesday. But Lufthansa was the least of the airlines worriers this week.

                While Wednesday’s sell off was a healthy breather for U.S airline stocks Thursdays sell off was far more detrimental. Apparently an Al Qaeda splinter group had taken control of Northern Iraq, including Iraq’s second largest city. This caused the price of oil to skyrocket to a 9 month high of $107 a barrel. To the airlines, whose very survival hangs on the price of jet fuel, this rise in oil prices caused a major sell-off, with shares of all major airlines down over 3-7%.

                So with increased competition in Europe, and rising oil prices is the party over for airline stocks? The answer is no! Competition in Europe does not really affect the American based airlines, and the rise in the price of oil was unwarranted and will fall during the next few months.

                The unwarranted rise in oil prices was due to commodity traders being worried that the flow of Iraqi oil will be interrupted by the insurgents in Northern Iraq. What these traders did not take into account was that the majority of Iraqi oil comes from the South, nowhere near the fighting. Even if the fighting does interfere with oil production Iraqi oil is no longer as much of a factor to the U.S market. The U.S now produces enough oil to meet its own demand and lobbyists from major oil companies are even now trying to have Congress pass an act allowing the U.S to export some of its oil.

                With U.S shale oil deposits producing so much oil U.S airlines are in a much better position to get there vital jet fuel then there European counter parts. Another point as to why the Airlines have been oversold and why Airline stocks will continue their march upwards is that many airline stocks are still very cheap.

                Delta airlines for example, the airline has a P/E of just 3.4, that’s amazingly cheap considering the S&P has an average P/E of 16. Delta airlines is probably the most attractive airline stock out there but other airlines like Southwest are also attractive, considering that Southwest does not even fly to Europe and so avoids the conundrum confronting the Airlines in Europe completely.

                To conclude this week’s sell off in the airline offers nothing but opportunity, as the market begins to correct itself after the sell off last week the airlines will regain their momentum. This sell-off provides the first opportunity to buy airline stock in a long while; I would take advantage of it.  
 
 
 
IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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ALSO COMMENT ABOUT WHAT YOU THINK OF THE BLOG AND ANY IMPROVEMENTS YOU WOULD LIKE TO SEE

 
IF YOU HAVE FRIENDS INTRESTED IN THE MARKET PLEASE LET THEM KNOW ABOUT THE BLOG SINCE IM AM CURRENTLY ADVERTISING SOLELY THROUGH WORD OF MOUTH

 
THANK YOU  
 
 

               

                 

Tuesday, May 27, 2014

Where Should You Invest Your 401K?


              As investors return from there 3 day weekend it appear as though they have come back happy, buying up stocks in all sectors and driving the U.S stock market to new highs. By now I’m sure you think you know what is coming, you think I am going to give another factual analysis of some hot new industry, I’m sorry to disappoint but today I am going to write about something completely different. This week’s article will be about where to invest your 401K.

                Although indexes are hitting all-time highs today it has been a bumpy ride over the last 6 months. Last year you could not have gone wrong by simply placing your 401K or savings into simple broad market funds, which would have gained over 25% last year. But this year despite the headlines the Dow Jones and NASDAQ are up barely 1%, which is a far cry from the gains made last year. So the question now becomes where is the best place to invest your 401K?

                Unless you are a seasoned investor investing your retirement savings could be tricky, considering you have no shortage of investment options. You could invest in broad market funds and ETF’s, commodities, Currencies, Treasuries, Corporate or Asset backed bonds, or you can invest in emerging markets. Ordinarily it is suggested that you keep 80% of your retirement savings in equities, to provide meaningful growth and the other 20% in bonds to provide stability. That is good advice but it’s very broad, below is an analysis of which equity, bond and emerging market funds might prove most attractive for those wishing to invest there 401K’s.   

Equities-

                2013 was a great year for equities and stocks in general, it was a year where the Dow and S&P both rose over 30%, but as 2014 is proving, those kind of gains across the board are highly unlikely to occur again anytime soon. In fact over the last year equities have gotten expensive, and no longer trade at the bargain prices they did a few years ago, meaning that returns from stocks will probably be muted for the next few years. What should also be taken into consideration is the possibility of a steep correction. A correction is defined as a drop of at least 10% and theoretically should occur once a year, but there has been no such drop in the last 2 ½ years which has led some investors to worry about the future.

                With market conditions as they are I have been minimizing my exposure to stocks recently, and I expect a correction of about 15% to occur soon. With that said which equity funds should you reduce exposure to and what should you keep?

                The first funds I would reduce exposure to would be funds focused on small and midcaps. Small cap stocks are companies with market caps of under $5 billion and mid-caps are companies with market caps of under $15 billion. Generally these stocks are more volatile than ordinary blue chips, which at times could be good because in bull markets they usually outperform the rest of the market, the bad news is in bear markets these stocks tend to suffer more. Funds focused on small and mid-cap stocks will most likely get hit hard during the inevitable correction, which is why I would recommend getting out of them. With that said after the correction occurs these funds will be the best investment because when the market bounces back small and mid-caps stocks will most likely outperform anything else out there.

                Small and midcap funds are not the only equities investors should start reducing exposure to; large caps will also not be spared during a correction. But besides the possibility of a correction another reason to lessen exposure to U.S Equities is that with stock prices getting a bit out of control returns from them will be reduced to maybe 5-6%. Which although is a healthy gain, your money could be invested in other areas where it will be more productive. One such area is bonds.

Bonds-

                While equities performed remarkably last year, 2013 was also a horrible year for bonds as investors, worried about the possibility of rising interest rates, pulled billions out of bond funds. Hence for anyone who maintained a large portion of their 401K in bonds suffered, this year things could be different or can they?

                With interest rates expected to rise sometime this year and with the Fed winding down its bond buying program bonds might suffer in 2014 also. So bonds might not pick up the slack in your portfolio left by your flattening stocks. With that said, high quality corporate bonds should perform well, and I would stay away from high yield junk bonds because these usually tend to mimic equities which are due for a no so light correction.

                If stocks are set to perform well over the next few years and bonds not ready for a comeback what is the best place to invest your 401K to achieve the greatest returns? The answer is emerging markets.

Emerging Markets-

                Yes I know emerging markets have not been the greatest investments so far in 2014, especially with the crisis that occurred in several of them in January and February. But in my opinion several specific emerging and international markets present a good opportunity.

                One of these markets is Russia; yes I know Russia has recently been hammered economically as the West imposed sanctions due to Russia’s involvement in Ukraine including the annexation of the Ukrainian province of Crimea by Russia. Russian stocks have not fared the crisis well, as Russia’s main index is down heavily in 2014 and analysts predict that Russia’s economy will most likely see any growth in 2014 due to current geopolitical crisis.

                Yet in Russia’s case the old saying of “The Best time to buy is when there is blood on the street” rings true. There seems to be light at the end of tunnel, for Russia anyway. Russian state owned Natural Gas giant Gazprom has recently signed a $500 billion deal to sell natural gas to China. And many Russian stocks amidst the selloff have become cheap and could be bought at bargain prices.

                Besides Russia several other emerging markets might prove attractive investments as well, India for one. After the election of the pro-business conservative government in India, India’s stock market has been enjoying a fantastic rally. But I would not get in on that action just yet considering the new Prime Minster has not yet proven himself and the new government has not instituted any meaningful economic reform yet.

                Whether or not you decide to invest in emerging markets is up to you but with equities flat and bonds uncertain the emerging markets along with cash might be looking like the best alternatives to which you could allocate your 401K to. But there are always other alternatives; there are always individual stocks that will flourish even amongst the worst bear markets and I will continue bringing you up to speed on which ones are the best investments.
IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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Sunday, May 18, 2014

Have Sports Teams Become too Large to Stay Private?


             Apparently hearing the words “All-time highs” has scared investors into dumping stock worldwide, and some stocks have been hit harder than others, WWE to name just one. But one person is clearly not crying over the Dow going through 2 triple digits losing days in a row, that person is billionaire, condemned racist and exiled former Los Angles Clipper’s owner Donald Sterling.

                The man worth nearly $1.5 billion has recently been fined $2.5 million by the NBA and forced to sell his Los Angeles Clippers after a recording of him saying racist comments about African Americans was leaked to the press. In response to the public’s outcry the NBA banned Sterling for life and forced him to sell the Los Angeles Clippers. The funny part is Donald Sterling stands to make windfall by selling the Clippers as a number of buyers have already appeared interested including Magic Johnson and Larry Ellison. Many expect the Clippers to sell for north of a billion, which means Sterling will profit nicely, considering he bought the NBA team for a mere $20 million in the mid 1980’s.

                Personally I am not very interested in sports but as a man interested in Finance and business I found the upcoming sale of the Clippers interesting because it threw the prices of NBA teams and sports teams in general into question.

                It has become apparent that over the last 30 years the value of Sports teams has gone up and up, reaching the point where now Sports teams have become large multi hundred million and billion dollar companies in their own right. Prices for teams have gotten so high that even the richest of the rich can no longer afford to singlehandedly pay for them.

                Mark Cuban, the billionaire, outspoken owner of the Dallas Mavericks (another NBA team) told CNN in an interview that he liked to invest in sports teams but prices have gotten so high that he could no longer afford to buy them outright. Cuban said that any offer to buy the Clipper’s or any other sports team for that matter would have to come from a joint bid by a number of large investors or Wall Street. When a man worth over $2 billion says he can no longer afford sports teams it calls into question whether sports teams have gotten too large to stay mostly in private hands.

                I find it strange that with all the money in sports there are very few sports team that are actually publically traded. Off course there are a few Sports related stocks out there, the Green Bay Packers an NFL football team are publicly traded so is Madison Square Garden. But those are only two, and there dozens of sports teams in the U.S alone.

                But I believe this might begin to change. With sports teams becoming large companies in their own right and requiring large amounts of capital to operate, the world of Sports might begin to drift closer and closer to Wall Street. This process has already started with a number of Private Equity firms taking positions in sports teams.

                Last year Joshua Harris and David Blitzer both business men who made their fortunes in the Private Equity field bought the New Jersey Devils, for an unreported sum. Both men announced that they will be managing the Hockey team like any other business, by putting profits ahead of anything else.

                As to the Clippers, the estimated price of the team is somewhere around $575 million, but with bids coming in the ultimate price paid will be considerably higher. But what interests me is why sell Donald Sterling’s share to any group of buyers at all? Why not sell those shares to the public through an IPO.

                The market for Sports is enormous and an NBA team going public would generate a lot of hype and this might translate into a successful public offering. So far I have not seen any news to support that the Clippers are going public but it is an interesting though none the less.

                In any case with the value of sports teams going up and up and up it is not crazy to think that in a few years many of them will begin to go public and when they do it will create a whole new industry for investors to look into.

                But obviously many of you are interested in how to invest in sports right now and not in a few years. If this is the case and you do not have hundreds of millions to buy directly into a team, you have a few options. First it is possible to invest in a private equity fund that specializes in sports, unfortunately these funds often require you to invest minimum amount of up to $100,000. If that is not for you there are number of sports stocks already out there.

                The most recognizable one is probably Madison Square Garden, which trades under the ticker symbol MSG. The stock has not performed very well in 2014 with shares down almost 13% this year, the company does trade at a premium to the rest of the market with a P/E ratio of 24.6X. When it comes to whether or not to invest in Madison Square Garden I might recommend against it considering the companies past performance. But for investors looking for a sports stock to add to their portfolios it is definitely an option.

                Regardless, as the value of sports teams goes up the chances that more and more will go public increases, and who knows soon I might be writing a blog on whether or not it is a good idea to invest in NHL, NBA, MLB, or NFL teams.
 
 
 
IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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THANK YOU  
 
 

               

                 

Sunday, May 4, 2014

Does Gogo Have a Chance of Survival?


               It appears as investors are beginning to feel less fearful since all major indexes ended the week with healthy gains. But not everybody fared as well last week, the shareholders of Gogo Inc. are probably still crying. The company has seen its stock plunge almost 46% year to date including a 25% drop on Monday. The question is why is Gogo bleeding as much as it is and will the company be able to stop it before it’s too late?

                Before I dissect Gogo’s problems it is important to understand what the company does. Gogo Inc. is a mid-sized company focused on providing 3G wireless connectivity to airline passengers while they are flying at 35,000 feet. The idea is ingenious and is meant to allow customers to use their mobile devices on the plane.

                Sounds good right, it’s actually every airline passenger’s dream, to be able to access their tablets and smartphones on the plane, freeing them from the boredom of travel and liberating them from the curse of paper books. Gogo currently is partnered up with Aero México, American Airlines, AirTran Airways, Alaska Airlines, Delta Airlines, Japan Airlines, United Airlines and Virgin America to deliver wireless 3G connectivity to their passengers.

                Gogo’s most recent partner is Air Canada which signed on as a client on April 8th. Also besides the airlines Gogo has 6,300 business aircraft equipped with communications services. So why is Gogo’s stock floundering?

                The answer is because Gogo’s 3G service is expensive, unreliable, slow and not really good for anything besides sending an email. But that is besides the point the quality of the service could and will be improved in time and Gogo appears to have the time as long as the company remains the sole player in this field. Unfortunately Gogo faces an enormous problem in the form of one of America’s largest telecom giants, AT&T. The $184.9 billion company announced just this Monday that it was planning on building a high speed 4G LTE based, inflight connectivity service in direct competition with Gogo.                 

                The second AT&T announced this news shares of Gogo plunged as investors begin to smell the scent of death on the company, and they may be right. Gogo is easily dwarfed and outmatched by AT&T in every way;

Gogo Inc.

-          Market Cap- $1.1 billion

-          2013 Revenue- $328.1 million

-          2013 Profit/Loss- ($145.9 million)  

-          Cash on Hand- $266 million

AT&T

-          Market Cap- $184.9 billion

-          2013 Revenue- $128.8 billion

-          2013 Profit/Loss- $18.5 billion

-          Cash on Hand- $3.339 billion

These numbers show a very bleak picture for Gogo Inc. even more so that AT&T is offering a superior network; 4G compared to Gogo’s 3G. To anybody this would seem to be the end of Gogo, the once strong growing startup that most recently posted earnings increases of up to 40% appears to have a stake put through it.

But investors should not write Gogo off, AT&T also announced that its own in-flight connectivity service will not be ready until 2015, this gives Gogo about a year to entrench itself and upgrade its network to get ready to compete. Gogo does have some advantages over AT&T one of which is that Gogo already has a client base which includes many of the major airlines. Also Gogo has over a quarter of a billion dollars of cash on hand which could go to helping upgrade its network and improve upon it.

Investors also have to consider that Gogo might be a good acquisition target for another large player entering this field. So far in 2014 large corporations especially in the technology and telecommunications industries have been buying up smaller competitors and startups to grow profits and gain footholds in new fields. With AT&T moving into the inflight network industry other giants might be interested to and if a rival of AT&T, such as Verizon with the cash and resources to compete with AT&T decides to enter the fray it might view Gogo with its network of clients as a perfect buy to gain the upper hand over AT&T.

Unfortunately this is only my opinion of a possible scenario and might not happen. It is far more likely that once AT&T builds its network and opens it for business Gogo will be forced into bankruptcy within a matter of months.

My advice to Gogo shareholders is to hold the stock for the time being and see what else develops such as possibility of a buyout.  Whatever the case Gogo is certainly not the first company to go through this and will not be the last now all the management of the company could do is prepare, prepare for either annihilation or survival.  
 
 
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Tuesday, April 29, 2014

A New Market in Electronic Cigarettes


              It’s been a rocky week as earnings continue to flow in, all major indexes ended the week in the red as the Dow shed over 140 points on Friday. It appears as though investors have begun to take notice of several notable earnings misses and more importantly the continuing escalation in Ukraine. Personally I feel that the sell-off on Friday sets up a good opportunity to buy stocks at slightly cheaper prices, especially of companies that announced good earnings like Apple for example.

                But once again it is not might style to predict the short term future of the overall stock market, instead I want to fulfill my promise from last week, which was to shed light on the alternative tobacco market specifically the electronic cigarette market.

                In last week’s article I wrote about the current state of the tobacco market, and analyzed earnings from Philip Morris International. I came to the conclusion that although geopolitical tensions and stagnation and collapse in the emerging markets might have negatively affected cigarette sales the future of the tobacco industry is far from bright.

                With that said, however, I also stated there is a bright side for tobacco companies and that is the fast growing market for alternative tobacco products like Electronic cigarettes. So far this market is worth about $2 billion, which is tiny when you think about it considering that the entire world tobacco market is worth over $700 billion. Now it is highly unlikely that electronic cigarettes will ever prove to be as profitable as regular cigarettes but it is very possible that E-Cigs could grow to become a $10-30 billion industry in the next 3-5 years.

                The E-Cig industry has also gotten a huge boost last Thursday as the Food and Drug Administration (FDA) has finally announced its new regulations over the sale of electronic cigarettes. And as far as regulation go the FDA’s new rules over the sale of E-Cigs were tame to say the least. The new regulations will not hamper the efforts of big Tobacco companies from entering the electronic cigarette market but they will force any company that plans on marketing an E-Cig to get FDA approval first (current E-Cig companies will have 2 years to submit their products for FDA approval).

                Other rules created by the FDA regulations are pretty standard, the regulations ban the sale of electronic cigarettes to minors, and they also prohibit free samples. The good news is that the regulations say nothing about prohibition of advertising, and flavoring. Basically the new regulations help protect current Electronic cigarette companies from competition.   

                The new FDA regulations might prove instrumental in helping solidify the electronic cigarette industry and gives it some creditability. The question now becomes which companies are in the best position to set themselves up in this new and fast growing industry.

                  Currently the largest Electronic cigarette brand is Blu which is owned by Lorillard, which is already a large player in the tobacco industry, with a market cap of $19.6 billion. The company owns the Newport brand of cigarette which on its own is a huge moneymaker, throw in Blu, which Lorillard owns through its LOEC subsidiary and you get a company that is a huge rival to any tobacco company. The company also clearly see’s that its survival depends on its exploitation of the Electronic cigarette market, which so far the company has done well as it purchased another E-cig maker during the 3rd Quarter of 2013, the British company SKYCIG.

                Lorillard has performed well in the last year with shares increasing over 27% and the stock has not performed badly this year when compared to the rest of the stock market, shares are up 6.79% year to date. Lorillard is definitely a huge player in the E-Cig field but as the top dog some may feel that the company has nowhere to go but down, I personally disagree since Lorillard’s Blu E-Cig currently controls 50% of the market which still leaves plenty of room to grow, at least in my view.

                Lorillard is not the only large tobacco company that has embraced electronic cigarettes, its competitors Altria, and Reynolds American have both recently released a line of their own Electronic cigarettes, but with that said all these companies are huge multi-billion dollar corporations and electronic cigarettes compose a very small percentage of their profits.   

                So these giants might not be the right fit for investors looking to profit from the E-Cig market, these investors might be better off looking at companies that strictly focus on Electronic cigarettes, companies like Victory Electronic Cigarette Corp and Vapor Corp.

                When compared to other Tobacco companies these companies are small time, Victory Electronic Cigarette Corp (ECIG) has a market cap of $670 million, while Vapor Corp has a market cap of just over $105 million. Now compare this to the multibillion dollar tobacco giants and it might paint a picture of doom for these small companies. But apparently investors did not mind the heavy competition and last year both ECIG and Vapor Corp saw their stocks fly through the roof (Vapor Corp is up 218% in the last year and ECIG is up a remarkable 2036%!).

                Now though with the volatility on the market and competition from large tobacco companies posing more of a threat investors have sought to punish these upstart electronic cigarette companies ECIG is down 30% in the last month and Vapor shares have also fallen 29% year to date.

                Personally I feel like these companies will not survive very long in an electronic cigarette market soon to be home to all the major tobacco players, but with that said they do provide far more upside potential then there larger competitors. Either way if you are hoping to get in on an up and coming market electronic cigarettes are definitely an option.
 
 
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