Musings

amit May 10th, 2006

Jeffrey P. Bezos, does not attract news like Bill Gates, or Larry Page, or Larry Ellison or a bunch of other people. But don’t let that fool you he is doing his share to innovate and bring a change through technology. Amazon is not a technology company it’s an online retailing giant, but with technology at its heart.

They have had a few hiccups: lost the contract with Toys R Us, published a very conservative outlook for the coming quarters and so on and so forth (Google finance it). Wall Street naturally and perhaps rightly dumped them, they are down to around $35 and this has me excited. For all the bad news, I think they GET the whole internet thing. They have the absolutely the best web services to access their stuff; the design, concept and even pricing of S3 leaves little to be desired, and although I don’t think A9 is spectacular with search it has its innovative features (check it out).

Essentially its time to get in, now they say the first rule of investing is never to be attached to a company – well screw rules. I love Amazon, I am not sure what Mr. Bezos is up to and I know his name doesn’t inspire confidence, but there is definitely something brewing there and I like the smell of it.

Tags: amazon, markets, technology

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amit March 13th, 2006

I didn’t really want to talk about Google in fact in my earlier posts I have mentioned that they were overpriced at 450 or something like that. But, now that the stock is not doing so well and all the naysayer are hounding the fort; I feel the urge to set the record straight.

I can understand people who feel: that the stock is overpriced at P/E of 70 or so; that there are better opportunities to be had at that price; that Google does not have, but a single source of revenue stream whose growth rate is suspect; that the stock is very risky and prone to fluctuations; or that the competition from Microsoft, Amazon and Yahoo may spoil the party. To them I don’t have much to say, these are all valid concerns – pick your cards and place your bets.

These guys (fuckedgoogle.com, speaking_of_trouble) on the other hand are a lot more fun and I would like to respond to them rationally knowing full well the result. As they say “Talk sense to a fool and he calls you foolish” – just that and it would be too polite; I really hope for a lot more.

Let me first address the argument that you have nothing to gain by owning Google stock because they don’t distribute dividends. There are income stocks (that distribute dividends) and then there are growth stocks, these are companies that see a higher ROI by investing their revenues back into the business. It is an efficient and well recognized model and the stock price grows with growing revenues thus providing a payback to the investor. The other doomsday argument seems to be that Google execs are selling their stocks thus signaling a sinking boat. Well, I prefer the management of the company I invest in to be smart, and they would be downright morons not to sell anything at this point, they have to lower their stakes in Google, its their payday, let them have it. As many analysts have pointed out these sales are not out of proportion (certain amount of stock options do get liquidated specially in a bull market), moreover some of them were declared more than a year earlier. But this rational speak is boring me, let me give you the reason for my chutzpah.

I trust technology, people and their attitude. The rest is all floss. Google has the best internet delivery infrastructure which so far has been exploited just for search but with the right vision could do lot more. Google management has the right vision in trying “to *organize* the knowledge of the world” and the right attitude towards fostering innovation. It’s a geek fest, have fun and maybe we will make some money. I buy that and will stand the tide.

<rant> Btw, if you think I am crazy … you are in good company, it’s a widely held perception amongst people who know me. And just as you would expect from a crazy !@#$!@#$ – I don’t give a damn. </rant>

Tags: markets

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amit January 31st, 2006

Before you read further, let me give you an insight from my family. There are people who “know” (like my father) – and they are mostly proved wrong. Then they are people who “know not” (like my mother) – and she is mostly lucky. And then there are people who “think they know” (like me) – and they mostly make an ass of themselves.

All of us know what PE means. Its the amount of dollars investors are ready to pay for each dollar of earning. For most of us it’s really simple. Low PE for a company that we know has prospects, makes it a good buy and vice-versa. To judge what’s low, we compare it to PE of the industry or to companies in the same business. Bada-bing Bada-boom .. done. And then we see these.

Huh? I like Google, Larry Page is God etc. but I am no Moses. I am not confident that the Red Sea is going to part for me. Google doing 4 times (23.65 * 4 = 94.6) better than Microsoft sounds audacious. And lets not even talk about these third world companies trading at a P/E 2 to 3 times of Microsoft. What gives? Aha, but I am forgetting what I preached before i.e. stick to what you know. I am not utilizing my knowledge of the software industry. These might be in the same business as far as my mother is concerned. But, I a software engineer/ programmer/ hacker/ developer (excuse the bit of an identity crisis here) [1] should know better.

Infosys and Cognizant are software services providers, while Microsoft is in the business of developing operating systems and Google is all things internet. Maybe this is an apples to oranges comparison. We are still stuck though. Infosys and Cognizant are very similar. Microsoft and Google, though still different are rapidly approaching each other [2]. So if we were to stick with P/E’s buying MSFT is no brainer. Why aren’t the investors being rational? Why are they flocking to all these other companies? You might say “Investors – rational is an oxymoron and it’s called market sentiment you idiot.”

Maybe so, but lets give it one more shot. How about growth potential? Let’s look at the PEG Ratio which is (P/E ratio) / Annual EPS Growth Rate (It’s in %). You look at PEG the same way look at P/E the lower the PEG the better value for money. Actully PEG is not scientific its just a rule of thumb. The popular interpretation being, if its 1 the stock is fairly priced, less than 1 its cheap, and more than 1 its expensive.

The EPS Growth rate are over a 5yr period, values taken from TD Waterhouse. I pulled Google’s growth rate out of thin air (the basis being 633% growth in the last quarter) since it does not have a 5yr history.

Now that gives an entirely different picture. Doesn’t it? It makes MSFT look freaking expensive and Google damn cheap. Didn’t somebody say you can prove anything with statistics. Healthy circumspection aside, I do think that CTSH and INFY are good buys. They have shown very high growth rates for about 5yrs and even if they slow down I don’t expect them to slow down by a lot. I would keep away from Google. It may have grown by 633% last quarter, but the party is not going to last for long.

What about our rule of thumb? PEG’s for all of these are still above or close to 1. Let’s flip the argument and assume a PEG of 1 for each of these i.e. we assume all of these are fairly priced. That implies the market is expecting 95% growth from GOOG, 24% growth from MSFT, 80% growth from INFY and 49% growth from CTSH. Which of these expectations are more likely to come true? Look at the growth rate in the past 5 yrs, your gut feeling about the prospects of these companies and you will know what to do. Sell all your stocks and buy CD’s (i.e. if you are rational).

Lastly, what about fluctuations in dollar values. Yes, these can definitely have an impact on valuations of foreign companies like INFY and CTSH. But, its slightly more complicated. A stronger dollar normally cuts into returns from foreign companies [3]. In this case though – these companies (INFY and CTSH) get most of their revenues in dollars – a stronger dollar is going to boost their bottom line thus have a positive effect.

Footnotes

[1] My friends employed in large public companies can’t help pitying me. I went from a “Core Programmer” at Elixar to a “Computer Programmer” at nsoftware. And yes the job title definitely reflects my skills and job duties – I was programming the “CORE” at Elixar and I am programming the “COMPUTER” at nsoftware. Scared – you should be. I will say this much for the MBA’s in the software industry, they might suck at everything IT, but they sure can come up with sexy job titles – Systems Analyst, Solutions Architect ….

[2] Don’t forget the tirade from Steve Balmer about Google, the fight over an executive switching sides, MSN Live, the rumour about Google providing Office online etc. etc.

[3] Thanks to Eric for pointing out a significant factor involved in investing in foreign markets.

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amit January 29th, 2006

A recent study attempted to evaluate the skills of amateur investors versus portfolio managers and investment pundits. To add zest to the exercise the savviest group of analysts were pitted against the sexiest porn stars. Thus ensued a battle of the libido’s. To the consternation of corporate America and to the amusement of the rest of us, our more desirable friends from Vegas beat the pants of the financial whiz kids 10 to 4 [1]. What’s their secret you wonder? Well, apart from plastic surgery, they stuck to the stocks they knew about i.e. the porn industry. The lesson here is that a portfolio limited to well known and understood industry/ environment at times is better than diversified picks. Even if these picks were based on thorough financial analysis. This is the basis of my recommendations.

What the !@#$ is BSE? And why should I care about it?

The Indian economy (GDP) grew at the rate of 7-8% 6.80% in the past year. As it has in the past few years. In comparison the American economy grew at a slower a measly rate of about 2% 3.70% per annum [2]. Is there a correlation between the stock markets and the GDP growth? I am no economist, but common sense dictates that the sum total of a country output has to have some co-relation with corporate earnings. The article “Does Sensex trace GDP growth?” explores this from an historical perspective. It concludes that at least in the long run there is a clear co-relation. That considered, investing in Indian markets seems to be a wiser bet than the S&P 500.

Let’s leave aside the macroeconomic argument, and simply compare how did the indices fare in the past one year – 31 Dec 2004 to 30 Dec 2005 [3]. The Bombay Stock Exchange (BSE) grew a whopping 42.33%, the S&P 500 posted a modest gain of 3.01%, the NASDAQ barely etched positive gains of 1.37% and the Dow Jones Industrial Average (DJI) slipped a little losing 0.6%. Do I need to say more? I certainly wish I had more money and more smarts last year. But we need to be careful here assumptions made on historical factors are mother of most if not all screw ups. So why am I really bullish on India and what about China? Surely similar arguments could be made for China.

Here is where I apply the porn insight, and no, I am not being a dick head. I am just going with what I know. I know India well. I know the stock markets, the pulse of the economy, the people who invest on a regular basis, the competitive advantage of Indian companies vis a vis the multinationals, the story of the burgeoning middle class, the outsourcing in the tech industry, the outsourcing in the back office jobs etc. etc. My gut tells me that the 42% growth of the BSE is not an aberration. I am by no means implying that the same is expected. But, that India has not yet peaked. There is more to come. If you are still with me and want a share of the Indian pie (or curry?) read on.

Prefer jogging for exercise?

For the more conservative among us the tickers IFN and IIF offer a diversified, professionally managed foray into the Indian markets. The India Fund, Inc. (IFN) is a closed-end management investment company that seeks long-term capital appreciation by investing primarily in Indian equity securities. The Fund is traded on the New York Stock Exchange under the trading symbol “IFN”. The details of IFN can be seen here [4]. The other option, India Investment Fund (IIF) is managed by Morgan Stanley. It is traded on the New York Stock Exchange under the trading symbol “IIF”. The details of IIF can be seen here. As expected, per our findings on BSE, both gave handsome returns in the calendar year 2004. The IFN stock went up 49.37% while IIF went up 33.73%. Although it beats me why the stock price of IFN grew more than IIF when the NAV of former grew by just 36.48% compared to 40.23% for the latter. I guess we attribute it to market sentiment – whatever that means.

Among the two, I like the portfolio of IFN – concentrated on Finance and IT – better than that of IIF – focused on Industrials and Consumer Discretionary. The former albeit more riskier is targeted for more aggressive growth than latter. I however don’t like the current premium [5] of 29.75% on IFN, as compared to a premium of 13.67% on IIF. One should note that IFN was selling at a premium of 13.94 at the end if the year 2005.

I wonder if the premium should be adjusted with the dividend yield. Since the dividends come out of the earnings of the fund they could have been re-invested thus boosting the NAV. Thus, perhaps, a true comparison metric should be (Premium – Dividend Yield) which is 29.75-9.07 = 20.67 for IFN and 13.67-0.88 = 12.79. Please let me know if you know better.

So how do we bed these? In my opinion the BSE is currently slightly overvalued resulting in higher NAV for both these funds. To avoid short term losses and to protect against volatility I would recommend buying the fund of your choice in 3 installments in Mar, Apr and May 2006. The reasoning being that the Indian financial year ends on Mar 31st and there is bound to be some adjustment as the annual results come out. This strategy would average out the pre and post result speculation and would set us up for long term gains.

How about kickboxing?

So much for sticking with the market. How about trying to beat the market? My plan here is to pick Infosys Technologies (INFY) and Cognizant Technology Solutions (CTSH). Again, I stick to the sector – Information Technology – I know, and the people – friends employed in both companies – whose opinion I trust.

Infosys Technologies (NASDAQ INFY) is clearly a popular growth choice in the Indian market. In fact, the ETF’s mentioned above have significant holdings of INFY in their portfolio. INFY constitutes 4.1% of IIF and 7.1% of IFN. The stock recently took a beating at the announcement of 3Q results. The results even though spectacular did not meet expectations. I think the market over reacted and I acquired INFY at 74.11. Its currently trading on 74.73 and is still at a good point to get in.

Cognizant Technology Solutions Corp. (CTSH) on the other hand with a P/E of 53.41 compared to INFY with a P/E of 78.66 is reasonably priced at this point. It’s 3Q results are expected sometime in early Feb making it a good buy for short term gains. Of course I expect the results to be better than expected. I intend to pick CTSH close to its currently traded value of 50.90 in the next few days.

Lastly, I would like to mention ICICI Bank Ltd. (IBN) and Citigroup Inc. (C) which I would have liked to pick if I had funds to spare.

Footnotes

[1] I read about it in an article on finance.yahoo.com, but was unable to google it at this time. You will have to take my word for it. Besides, if a bunch of monkeys throwing darts can beat our friends at the Wall Street – all of us have heard and some of us consider that to be a plausible story – then surely, its no mean feat for a few hard working, and good looking gals.

[2] Too lazy to look up the exact numbers, if you know better please point them to me.

I stand corrected. Gent pointed out that the US GDP grew by about 4.0% (it’s 3.70%) and he is correct. The exact numbers are mentioned below, they have been extracted from Economic Research Service, United States Department of Agriculture. The growth rates for US can also be seen here (Bureau Of Economic Analysis).

Note: The growth rates for 2005 are projections made from data till mid December. They are to be revised, but large variation is not likely.

[3] All data from finance.yahoo.com. Give it a shot, I like it better than research data from my brokers, TD Waterhouse and Scottrade.

[4] In course of writing this I discovered the website http://www.etfconnect.com. It is a great resource for researching ETF’s.

[5] For closed end ETF’s, the Net Asset Value (NAV) can be computed based on their holdings. It is the dollar value per share if all the equities held by the fund were liquidated. The premium is the percentage of the stock price to the NAV i.e. how much more the stock is trading for compared to the market value of its assets.

Tags: markets

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