Monday, February 28, 2005

Useful Website

I found a pretty useful website that tells you what some of the "Gurus" of investing are actually investing in currently. Here is a list of some of the Gurus:

  • Warren Buffett (Obviously)
  • The Soothsayer of Omaha (Just Kidding)
  • Kenneth Fisher (I wouldn't call him a "Guru", but it's not my list)
  • George Soros
  • David Dreman
  • Bill Miller
  • Wallace Weitz
  • Bill Nygren
  • Etc.

The useful part about this website is that it actually tells you what these famous investors are doing with their portfolios right now (There is a slight lag).

For example, it seems that George Soros is buying up MO at $50, PFE at $28, SGP at $18, IP at $40, and MRK at $28. He's also selling SLB, ORCL, JOSB, DVN, GFI, COT, CVX, BR, BJS, BAX, ADP, and BUD.

The website is www.gurufocus.com and I highly recommend it. Enjoy!

Best Regards,

The Soothsayer of Omaha

Friday, February 25, 2005

Investment Roundtable - Comcast Corporation (Nasdaq: CMCSA)

This week the Investment Roundtable is taking on Comcast Corporation (NASDAQ: CMCSA). Comcast is the largest cable TV system operator in the US, with around 21.5 million subscribers in 35 states. Comcast currently has a market cap of around $44 billion according to Standard and Poor’s, which puts it at the top of the pack.

The big news, I believe, with Comcast are the recent investments by my sworn enemy…Mr. Warren Buffett. It seems that Mr. Buffett doubled Berkshire Hathaway’s holdings of Comcast to the tune of $328.4 million as of December 31st. This is very interesting. Most value investors would not suspect this move. Recent actions by the famed investor have really sparked thoughts of changed investment practices.

Let’s take a look at the fundamentals that Benjamin Graham was so fond of to see if we are missing something:

P/E 76.5: No, Benjamin Graham criteria would require a P/E below 20

Price/Book 1.76 = No, BG criteria requires a P/B of below 1.5

Current Ratio 0.4 = No, BG criteria requires a CR greater than 2.0

Revenue Growth (5-Yr Avg) 27.82 = Yes, BG criteria requires a growth rate of at least 15%

Intrinsic Value $23.30 (S&P Fair Value) = No, BG criteria requires the stock to be below intrinsic value by at least 15%

Yield 0% = No

Comcast passed one out of six of our Benjamin Graham value tests, which give it a score of 16.67%. Definitely not a passing grade. We can also take a look over at Nasdaq.com to see what they think Benjamin Graham would think of this stock. You can look yourself for this and any stock at their Guru section. Nasdaq.com’s Guru section gives CMCSA a score of 29%. Here is what they had to say in detail:

SECTOR: [PASS]

CMCSA is neither a technology nor financial Company, and therefore this methodology is applicable.

SALES: [PASS]

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. CMCSA's sales of $20,307.0 million, based on trailing 12 month sales, pass this test.

CURRENT RATIO: [FAIL]

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. CMCSA's current ratio of 0.41 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL]

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for CMCSA is $20,093.0 million, while the net current assets are $-5,100.0 million. CMCSA fails this test.

LONG-TERM EPS GROWTH: [FAIL]

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for CMCSA were negative within the last 5 years and therefore the company fails this criterion.

P/E RATIO: [FAIL]

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. CMCSA's P/E of 75.96 (using the current PE) fails this test.

PRICE/BOOK RATIO: [FAIL]

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. CMCSA's Price/Book ratio is 1.76, while the P/E is N/A. CMCSA fails the Price/Book test.

So, Comcast is not a value play. Why would Buffett be interested then? I don’t know, but I’m sure he does. The other Buffett investment that threw me for a loop was his purchase of LVLT’s bonds until he pretty much doubled his investment in a few months. He’s not one of the best investors of our times for no reason.

The one trend that is definitely going for this company is that I don’t think American’s are going to stop watching cable TV any time soon. Cable providers are even aggressively capturing market share in the telephone service and high-speed internet connection realms.

George Soros has also made a recent investment through his purchasing of Time Warner (NYSE: TWX) shares. These two great investors could be on to something here. But there is also a bearish case according to the Financial Times: “Still, the cable companies are far from in the clear. They remain a favourite sector of bearish hedge funds who feel the group still faces the risk of "disintermediation", or removal of the middle man. Cable companies' advantage has long been being the "pipe" that delivers content into the home, but with content being increasingly delivered over the internet but as internet delivery increases, the need for the "pipe" lessens.

There is certainly going to be massive competition, but betting against Mr. Buffett and Mr. Soros is something most investors are not want to do.

Now let’s take a gander at the charts to see if we can find where the supply and demand are popping up. As always, I will start with the monthly view:


Click to Enlarge Monthly Chart Posted by Hello

As we can see from the monthly chart, most of us would have had liked to have been investors in Comcast in 1997. Hindsight is obviously 20/20, but a man can dream. The point of these roundtables is to let our readers know if we would be investors today, at this very second. My initial reaction would have to be a no, but maybe soon.

I wouldn't be an investor in Comcast until it breaks above its newest downtrend that began at the beginning of 2004. This could be easy and it could be difficult, but that is not the point. The point is that as an investor, it would be nice to see some strenght on this follow through.

Comcast has made a higher high and a higher low from its bottom it made in 2002. Now, we want CMCSA to prove to us investors that it has the strenght and the will to continue this move upward. Mr. Buffett believes it will, but I will let the charts prove it to me.


Click to Enlarge Weekly Chart Posted by Hello

The weekly view doesn't add much to the debate. The same trendlines jump out at me. I do however like how Comcast has held above its 200-Week MA. You can also see that CMCSA is getting close to the point of decision. The downtrend and uptrend are soon to converge and Comcast will have to choose whether to go higher or continue the downtrend lower.


Click to Enlarge Daily View Posted by Hello

Again, nothing really jumps out at me in the daily chart that I couldn't see in the monthly or weeky. CMCSA seems to have found some support at the 50-Day MA and we shall see how long that lasts for. Comcast has finally filled the gap and could be heading back down to re-test the uptrend line. The stochastics are in overbought territory and the RSI is trending lower.

In summary; I wouldn't want to be on the other side of a Warren Buffett trade, but I don't think Comcast has proven anything to us investors yet. Comcast is definitely not a value play and is in a tough competitive industry so this is not an investment that interests me. If you are compelled by the Comcast story, I would keep my money on the sidelines until CMCSA breaks above the $33.25/share level with some oomph.

P.S. Check out the other contributors of the Investment Roundtable. They are all very insightful and worth your time:

Technically Speaking (Blog Formerly Known as Ron's Stock 'n Stuffer World)
Sixthworld Management and Commentary
Jaloti

Best Regards,

The Soothsayer of Omaha

Something More to Think About

I try to mostly stay out of politics on this blog, but this is a good article from a good source about some secrets in the privitization debate that Wall Street is holding. This article is not meant to sway, but is intended for you to think about the issue more.

Best Regards,

The Soothsayer of Omaha

Something to Think About

Here is something crazy to think about. The Chairman himself, Mr. Alan Greenspan, will be gone in 9 months. What's going to happen? Will this be the time when the bears finally win out and their predictions come true or will the new Fed President be just what the market ordered?

Here is one interpretation.

Best Regards,

The Soothsayer of Omaha

Tuesday, February 22, 2005

Microsoft Recommendation Update

Microsoft is getting pretty close to giving a valid break of the uptrend line. A valid break usually consists of a close below 3% of the uptrend line. That would mean that MSFT would have to close at $24.98/share for the uptrend break to be considered valid. MSFT is currently trading at $25.48, which gives the position about 2% more wiggle room. This level is pretty close to where the 50 and 200-week moving averages are hanging out. I would consider a valid break of those two indicators reason to sell out of this position. I will keep you updated.

P.S. I see Ron over at Technically Speaking (Used to be Ron's Stock 'n Stuffer World) has jumped on my MSFT trade bandwagon (Just Kidding). He's long at $25.66 with a tight stop. I hope it works out for everybody.

Addendum: I would get out of this position. Today (2/22/2005) MSFT closed at $25.23, which is below the 200-Day Moving Average. It is on lower volume, but it is better to be safe then sorry as the children's saying goes.

This is why I recommended only a 1/2 position. The investment/trade looked very promising, but it had not broken out to the upside yet. You should always wait for a clear break to the upside to get 100% all the way in.

As always, we will be watching and waiting.

Best Regards,

The Soothsayer of Omaha

Warren Buffett Sighting

Mr. Buffett recently made a trip to Vanderbilt to allow some of the students at the Owen School of Management to interview him. Here are some of their notes.

Thanks to www.vinvesting.com for this excellent resource.

Best Regards,

The Soothsayer of Omaha

Monday, February 21, 2005

Interesting Data Observations

While doing my weekly data collection ritual I noticed some interesting data points.

First of all, the S&P 500 P/E fell from 20.86 for the 2/11/2005 week to 19.71 last week. The Dow Jones Utility Index's P/E dropped from 19.19 for the 2/11/2005 week to 17.85 last week. If you look at the charts, this phenomenon must be from an increase in earnings and not a price change.

Also, if you will note my past big picture chart posts claiming that the big markets (The Dow Jones's) were looking a little toppy the past few weeks. It seems that during the week of 2/4/2005 specialist shorts nearly doubled from 255,265 to 457,465, member shorts went from 545,305 to 781,746, and public shorting went from 500,416 to 541,172.

I'm looking forward to next week to see if the shorts went up again and to see if the trend is going to continue. The short selling trend has been increasing lately since the week of 1/21/2005.

Best Regards,

The Soothsayer of Omaha

Saturday, February 19, 2005

Investment Roundtable - Apple Computer (Nasdaq: AAPL)

This weeks Investment Roundtable is discussing Apple Computer (Nasdaq: AAPL). I kind of dreaded this choice by the Roundtable members. This company is very difficult to analyze intelligently. AAPL is obviously not a value pick, but as always I like to add my two cents to the Roundtable process.

Fundamentally, this company is rather expensive based on Benjamin Graham criteria:

P/E 70 = No, Benjamin Graham criteria requires a P/E below 20.

Price/Book 6.14 = No, BG criteria requires a P/B value below 1.5

Current Ratio 2.6 = Yes, BG criteria require a CR above 2.

Revenue Growth -0.68% (Avg 10-YR) = No, BG criteria requires a 15% growth rate.

Intrinsic Value $60.20 = No

Yield 0% = No

Apple Computer passes one out of our six requirements, which gives it a value score of 16.67%. Over at the Guru site on nasdaq.com AAPL received a Benjamin Graham value score of 43%. Here are the details of their report:

SECTOR: [FAIL]

AAPL is in the Technology sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. At that time they were not the driving force of the market as they are today. Although this methodology would avoid AAPL, we will provide the rest of the analysis, as we feel times have changed.


SALES: [PASS]

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. AAPL's sales of $9,763.0 million, based on trailing 12 month sales, pass this test.


CURRENT RATIO: [PASS]

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. AAPL's current ratio of 2.58 passes the test.


LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS]

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for AAPL is $0.0 million, while the net current assets are $5,098.0 million. AAPL passes this test.


LONG-TERM EPS GROWTH: [FAIL]

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for AAPL were negative within the last 5 years and therefore the company fails this criterion.


P/E RATIO: [FAIL]

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. AAPL's P/E of 70.59 (using the current PE) fails this test.


PRICE/BOOK RATIO: [FAIL]

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. AAPL's Price/Book ratio is 6.14, while the P/E is 243.90. AAPL fails the Price/Book test.

So, Apple Computer is not a value play…big surprise. Apple Computer is a recent growth story with the implementation of the iPod and iTunes strategy. It’s obvious that AAPL has made its recent resurgence because of one product. There are only so many people that can be a customer for a company’s one product. Standard and Poor’s believes that year-over-year growth rates from iPod sales peaked in the December 2004 quarter and they also expect the revenue growth rate to decelerate over the next year. It will now be up to Mr. Jobs to turn that success into a launching pad for Apple’s other products.

Mr. Jobs began their retail strategy to entice new iPod users over to the Mac family (some would describe it as a cult). They had 86 stores at the end of FY 04 and want to bring that number up to 125 by the end of FY 05. This strategy seems to be working pretty well. AAPL is expected to have revenue growth of 55% in FY 05. This strategy isn’t keeping very many of their past resellers happy. There is a recent lawsuit from these resellers that could be a downer for price appreciation.

Will iPod users convert to Mac PC users? Doubtful at best in my humble opinion. This leads me to believe that the stock price is over extended. Let’s take a look at the technicals to see just how extended AAPL is. As always, I believe I help out the Roundtable process with my long-term outlook on investing. We’ll start by looking at the monthly view:


Click to Enlarge Monthly Chart Posted by Hello

As you can see by the monthly chart, AAPL began its recent rise from a breakout from a three year base in March 2004. The only thing this monthly chart is telling me is that this recent rise had been rapid and unsustainable.


Click to Enlarge Weekly Chart Posted by Hello

The weekly chart doesn’t really clear much up.


Click to Enlarge Daily Chart Posted by Hello

The daily chart at least leans a little bit to the helpful side of the equation. You can see two triangles that have helped spring AAPL higher and higher. This past triangle has a minimum target of $102 (($70-$33) + 65), which would be a gain of 17.5% from here. I don’t know if it is worth the risk of finding out if AAPL makes it to there.

This is why I dreaded writing a report about Apple Computers. With a price run-up of almost 250% in under a year it is hard to imagine that there is much room left to the upside. But, if the late 90’s taught us investors/traders anything it is that you should never under estimate the psychological factor. AAPL could get pushed up to $200 (Pre-Split) before it crumbles. With the split emerging on February 25th Apple could find a whole new group of investors interested.

In summary, I wouldn’t be putting my hard earned money into Apple Computer stock. The risks far outweigh the rewards. There are many other good looking candidates out there with much better risk/rewards ratios. You would be better served in finding one of those.

Please visit the other members of the Investment Roundtable to see what they have to say as well:

Ron's Stock 'n Stuffer World
Sixth World Managment and Commentary
GalaTime
Jaloti
Bill Cara

Best Regards,

The Soothsayer of Omaha

Thursday, February 17, 2005

Falling From Grace

Here are two stocks that have broken down that could have larger implications for the market in general.


Click to Enlarge Posted by Hello

Above you will find the chart of Fannie Mae (NYSE: FNM). It has finally broken out to the downside. I've been waiting for that to happen for quite a while (Reminds me of Krispy Kreme). There are a lot of secrets going on in and around this company. I don't think we'll get the full story until investors have lost enough money for a political upheaval. If you're not out now, get out! You have been warned.


Click to Enlarge Posted by Hello

This chart is of Phelps Dodge (NYSE: PD), which has also broken out to the downside. This has definite implications in the commodities world. When investors/traders want a quick look to see what copper is doing, they just pull up the quote/chart of PD. This technical breakdown could be one hint to a not so bullish commodity outlook this year.

Just some random thoughts and charts...I hope you enjoyed them.

Best Regards,

The Soothsayer of Omaha

Wednesday, February 16, 2005

The Big Picture

Let's take a look at the big picture for a moment. Below you will find the monthly charts for the DJIA and the Nasdaq 100. They are both painting a different picture and keeping me up at night. One (DJIA) is looking rather toppy and the other (NDX) is looking like it just broke out from a very bullish bottoming pattern. Your guess is as good as mine. Let's take a look:


Click to Enlarge Posted by Hello

As you can see from the monthly chart above, the DJIA is currently at its long-term downtrending line at around 10,890. Will it break out to new multi-year highs? The RSI and Stochastics are pionting to no, but there is no fighting the market. This will definitely be interesting.


Click to Enlarge Posted by Hello

Now for the conundrum, the Nasdaq 100 looks like it broke out of an inverse head and shoulders pattern on 11/03/2004. The price level has now come back down to re-test the neckline on the monthly view. If you look at the shorter time periods, you will see that the NDX has successfully bounced off of the neckline. The red dotted line is the minimum target if the NDX did indeed just break out of an extremely bullish bottoming pattern.

Any thoughts???

Best Regards,

The Soothsayer of Omaha

A Few Monthly Charts

This post has nothing to do with fundamental analysis, but sometimes I like to peruse through the Dow 30 charts every now and then to get a taste of where some of the big boys are going. Below you will find some of the Dow Jones Industrial Average (DJIA) components with some commentary. I think you will see the efficacy of looking at the monthly view of these big boys for long-term supply and demand trends.


Click to Enlarge Posted by Hello

AIG - This insurer seems to have bumped up against resistance in the forming of a symmetrical triangle. Wait for a breakout in either direction before investing one way or another. There was a lot of volume on the last touch of the uptrending line. That shows quite a bit of support around the $60/share area.


Click to Enlarge Posted by Hello

CAT had quite a breakout in the middle of 2003. It has gone from around $55/share to the low $90's, which isn't half bad. Those invested might want to tighten up their stops here and begin looking for a way out.


Click to Enlarge Posted by Hello

GE has had quite an uptrend since the beginning of 2003 from $20/share to the upper $30's. Still looking good.


Click to Enlarge Posted by Hello

GM - The car manufacturers have been going through a rough time lately. They all look pretty cheap, but there are reasons for that. Could the car industry turn around? I don't know, but that $31/share area is looking pretty tempting. It wouldn't be the first time technical analysis has called a bottom before the fundamentals caught up. We shall see.


Click to Enlarge Posted by Hello

IBM has found resistance at the $99.16 area twice now. Will it break above?


Click to Enlarge Posted by Hello

MO definitely broke out at the end of 2004...how much further is the question? As always, look for consolidation before jumping in.


Click to Enlarge Posted by Hello

MRK - Nobody should have even been in this stock when the bad news about Vioxx came out. Merck has been in a downtrend ever since 2001. Never invest long during a downtrend...you are just asking for trouble.


Click to Enlarge Posted by Hello

PFE - Same thing with Pfizer as Merck. Nobody should have even been invested since Pfizer has been in a downtrend since late 2000. Did we find a bottom at $22/share on the last day of December 2004? I don't really care. I'm not paying to find out. The reward to risk ratio just isn't there.


Click to Enlarge Posted by Hello

INTC seems to be consolidating during an extended bottoming process. I am an advocate of buying 1/2 positions before breakouts. If I were a betting man, I would say that Intel would break out to the top side of this consolidation. You never know...until you know.


Click to Enlarge Posted by Hello

Verizon (NYSE: VZ) seems to have broken out of the downtrend that began at the end of 1999. VZ has now come back to re-test at the apex of the triangle. Higher prices in store? A better picture overall for the telecommunications industry?

These are just a few short thoughts on a few of the components of the DJIA. Use them as you wish.

Best Regards,

The Soothsayer of Omaha

Tuesday, February 15, 2005

A Reader Question...

A reader had this question with regards to my second Microsoft post:

"600 shares will cost you more than $10,000. Are we in a margin account or buying up the $10,000 and stop?

Also, any special thoughts on margin account?"

First of all, no I was not using a margin account for the example. The example was very basic and I stated such. I probably did get caught up in the simplicity of the example, though. Thanks for catching it.

The reason why you could have purchased an entire account of only Microsoft stock is because you were getting in at such a risk adverse spot. The purchase area was sitting right above a trendline. The example still holds up. You would have only been risking $500 of your entire account. This should also show you that getting in at an "intelligent" point can really boost the reward you get for a certain level of risk.

But, getting into more detail, many investors/traders along with doing some sort of previous calculation also have a few more rules regarding risk. One of the other rules that would have saved me from this embrrassing mistake is to only put a certain percentage of your portfolio into one stock. This is better known as diversification. Maybe you only want to put 10% of your portfolio into any one stock. This would mean that you could have a maximum of 10 stocks at any one time.

Let's see the new equation with this rule put into place:

$10,000 Portfolio
$10,000 * 5% = $500 at Risk
$25.32 - $24.50 = $0.82 Risk per Share
$500/$0.82 = 609 = Round Down to 600 shares

Only want to put 10% of your portfolio into any one stock:

$10,000 * 10% = $1,000
$1,000/$25.32 = 39.49 = Round Up to 40 shares

So, your "risk" equation will allow you to purchase 600 shares and your "diversification" equation will allow you to purchase 40 shares. To be safe you could always go with the lower of these two equations. Once again, this example and information is basic and more detailed and complex information can be found.

As far as margin accounts go, I'm all for them if the investor knows what he/she is doing. The only way to know that is from hindsight though. If you lost all of your money, margin was a bad idea. If you grew your capital 5X, it was a great idea. I know this answer doesn't help, but it really is on a person to person basis that this decision is made.

Best Regards,

The Soothsayer of Omaha

Sunday, February 13, 2005

Investment Roundtable - Toyota (NYSE: TM)

I had a very nice report written about Toyota for the Investment Roundtable, but somehow Blogger's software screwed up. Since the report took me many hours to research and write, I don't have the time or patience to re-write it.

Basic Conclusion = Don't Buy shares in Toyota!

I apologize for the short post and I hope it does not happen again.

For some real posts check out the other members who write for the Roundtable:

Sixthworld Management and Commentary
Ron's Stock 'n Stuffer World
Jaloti

Best Regards,

The Soothsayer of Omaha

Thursday, February 10, 2005

Microsoft Part Deux (Diminish the Risk)

Earlier this week I recommended Microsoft as a purchase for the long-term security holder. As a secondary part of the Microsoft recommendation, I will go through an exercise that will help you figure out the correct position size for your portfolio.

Here is my actual summary from my last report "...I would purchase a half position at this point and wait to purchase the other half once MSFT breaks above the upper trendline. Microsoft is in good shape financially and has now started to shape up technically. At these levels Microsoft is a good candidate for a long-term portfolio position."

Once again, I will assume I currently have a $10,000 portfolio. MSFT's current share price is around $26/share. Since I am a long-term investor, I am willing to risk 5% of my entire portfolio on my MSFT purchase.

Here are the calculations:

$10,000 * .05 = $500
$500/$26 = 19.23 = Round Up to 20 shares

If we are willing to sacrifice our entire position, we are allowed to purchase 20 shares of MSFT. Most of us would not be willing to watch our Microsoft position erode to $0. So, we would establish a stop (real or mental). I would place my stop right below the uptrend line around $24.50. If MSFT gets to $24.50, we will sell our position.

Here are the new calculations:

$10,000 * .05 = $500
$25.32 (Purchase Price) - $24.50 (Stop Price) = $0.82 of Risk per Share
$500/$0.82 = 609 = Round down to 600 shares

But, remember that in my summary I suggested that you work your way into this position with just a 1/2 position right now and the other 1/2 on the complete breakout from the triangle. In that case you would just divide 600 by 2, which would give you an answer of 300 shares. The next purchase would be smaller than 300 shares since the per share price will be higher. All you have to do is follow the above steps and you should be okay.

This is very simplistic and there are many ways to figure out what your position size should be. There are many places to look for more sophisticated methods. You just have to look. The above method might be simplistic, but it will help you in keeping your risk down. I hope this helps you understand that being a good investor is not just about picking "winning" stocks.

Best Regards,

The Soothsayer of Omaha

Monday, February 07, 2005

Growth or Value?

Two weeks ago I wrote up a report on AT&T and last week I wrote up a report on WMT. The AT&T advice didn't really work out since they got bought out pretty quickly after my report. Do you think SBC Communications was reading what the Soothsayer had to say? (I doubt it too!) We are still waiting on WMT to break out, but they had a pretty good last quarter. I've also written up a report over at www.billcara.com that you should peruse on Kos Pharmaceuticals.

This week I am going to write up the stalwart of technology companies. This company is the world's largest software company at an astounding $284.8 billion market cap. That's right...I'm talking about Microsoft. I see capital appreciation in the future for Microsoft and I wanted to share my views.

Microsoft isn’t a value stock as Mr. Graham would describe it, but it is a big cap with some value. Can you believe Microsoft has zero debt...absolutely none? That seems impossible in this day and age, but it is true and it’s been true for the past 9 or so years. They have a strong balance sheet and a definite market leadership position. This is one for the long-term portfolio.

Microsoft has several different businesses. They have their client software business, which is their largest at 31.4% of sales, information worker software (29.3%), server products (23%), Home and Entertainment (7.8%), MSN (6%), Business Solutions (1.8%), and their mobile business (.7%). Here is what Standard and Poor have had to say about each segment of their business:

“MSFT’s Server and Tools segment consists of server software licenses and client access licenses for Windows Server, SQL Server, Exchange Server, and other servers. Windows 2003 Server is the latest release for an operating system for servers, to help build and deploy distributed applications for networked PCs.

“The Information Worker Segment is responsible for developing and delivering technologies that focus on improving productivity for information workers in corporations. Office suite, which includes the popular Word (word processing), Excel (spreadsheet), PowerPoint (graphics), Access (database management) and Outlook (messaging and collaboration) software programs, dominates the application software market just as Windows dominates operating systems. MSFT Office System, the latest version, was introduced in October 2003.

“The Business Solutions segment includes the businesses of Great Plains, bCentral and Navision. The segment develops and markets a wide range of business applications designed to help small and mid-market businesses become more connected with customers, employees, partners, and suppliers.

“The MSN segment includes MSN Subscriptions and MSN Network Services. MSN subscription services include MSN Internet access, which provides dial-up Internet access, and other premium services. MSN Network Services, which provides services on the Internet, including MSN Search, Messenger, and Hotmail. Partners include ESPN, Expedia, and MSNBC.

“The Mobile and Embedded Devices segment consists of Windows Mobile software, Windows Embedded device operating systems, MapPoint, and Windows Automotive. Windows Mobile software powers Pocket PC, Pocket PC Phone Edition, and Smartphone products.

“The Home and Entertainment segment includes the Xbox video game system, PC games, the Home Products Division, and TV platform products.”

That’s a diversified revenue stream!

According to the Value Line Research report, “Demand for the company’s server products is especially strong, and that should continue to be the case as it rolls out applications to help users better manage their systems.” Along with their tried and true businesses, where I think Microsoft is still in the growth phase is in the home entertainment portion of their business.

To establish the Windows PC as the hub of home entertainment, Microsoft is building technologies into Windows that improves the PC’s ability to work with digital audio and video. MSFT and its partners are also creating a wide variety of entertainment products and services, from portable audio players to online music stores, that support this role for the PC. The Xbox and Microsoft TV are basically hedges against market changes that could reduce the PC’s relevance in the home, but there are definite long-term opportunities in both businesses as well.

Microsoft is looking for 8%-10% PC growth worldwide driven by improving corporate demand, which should translate to continued better results. Their newer products like the Internet TV software, Xbox, SQL Server, and MSN should increase growth in the future.

So, let’s take a look at some of the value criteria that Benjamin Graham was so fond of:

P/E 27.17 = No, the Benjamin Graham criteria would require a P/E below 20

Price/Book 3.74 = No, the BG criteria requires a P/B below 1.5

Current Ratio 2.95 = Yes, BG criteria requires a CR of at least 2

Intrinsic Value $33 = Yes, BG criteria requires IV to be at least 15% higher than the current price

Revenue Growth 23% (10-YR Avg.)= Yes, BG criteria requires at least 15% revenue growth

Yield 1.2%

You can see that by passing only 60% of our BG criteria that MSFT is not on the strict value investor’s radar. Checking over at nasdaq.com on their Guru page we can see that Microsoft passes 57% of their BG criteria.

Value investors will however like MSFT’s new outlook on dividends and giving back to the investor. Not only has MSFT’s raised it’s dividend to $0.32/share, but they have also agreed to a share repurchase program. They have agreed to a $30 billion stock repurchase program commencing over the next four years. This should give the long-term shareholder something to cheer about.

I have given my fundamental reasons for a long-term purchase of MSFT shares and now I will look at MSFT technically to find support and resistance areas for an intelligent area of accumulation. As always we will start with the monthly view.


Click to Enlarge the Monthly Chart Posted by Hello

The most noticeable technical attribute on the monthly chart is the extremely long flat top ascending triangle. The triangle begins in December of 2002. Microsoft has already broken out of a few downtrend lines. One of those trendlines began in July 2000 and another that began in June 2001. The reason for not exploding out of these trendlines has been the uncertainty of the antitrust litigation. That is now all behind Microsoft…for now.


Click to Enlarge the Weekly View Posted by Hello

The first weekly view here gives us a better idea of this "flat top triangle", which might not be a flat top triangle at all. The upper trendline is not as flat as it seemed in that monthly view. What I know is that once MSFT breaks above that upper trendline, it's basing will be over.

We can also see some fine support at its current price level. MSFT has two uprending lines and the 50 and 200-Week MA's for support. There is some definite support in this area. Stochastics and RSI seem to be trending upward, which is nice.


Click to Enlarge the Weekly View Posted by Hello

On this next weekly chart I wanted to show you the on-balance volume (OBV). You can see that it has flattened out and has now begun to correct upward. This tells us that there is now some money coming into this stock.


Click to Enlarge the Daily View Posted by Hello

Looking closer at our triangle, we can see that MSFT is having some trouble with the 50-day MA. I don't believe this level will be a problem to break through. The weekly view is telling of higher prices ahead and it always trumps the daily view.

In summary, I would purchase a half position at this point and wait to purchase the other half once MSFT breaks above the upper trendline. Microsoft is in good shape financially and has now started to shape up technically. At these levels Microsoft is a good candidate for a long-term portfolio position. A more advanced strategy could be taken with the use of options.

Best Regards,

The Soothsayer of Omaha

Friday, February 04, 2005

Warren Sighting

My arch nemesis is smarter than words.

Best Regards,

The Soothsayer of Omaha

Thursday, February 03, 2005

Post on Another Blog

For those of you who do not visit www.billcara.com every day (you should by the way), I have a research report up over there that some of you might be interested in. The report is on Kos Pharmaceuticals. It is more of a GARP stock rather than a straight value stock, but some of you might still be interested. Go check it out!

Addendum: I don't know if that many people took my advice (I'm not that conceded), but within 30 minutes of Bill posting my report the stock rocketed 3.7%.

Best Regards,

The Soothsayer of Omaha

Tuesday, February 01, 2005

Wal-Mart Purchase Sequal

My last recommendation was to look for entry into Wal-Mart (NYSE: WMT). I stated my case and claimed that a good entry position would be in the $55.50-$55.75 region (look for good volume on the breakout). Today, I will describe the second step of investing...position sizing and risk control.

A lot of individual investors have way too much risk tied up in any one investment. It is probably the leading cause of those who are wiped out playing the investment/trader game. As an investor/trader, you have to realize that you are not always going to be correct. You will invest in a complete loser many times in your life (I'm talking about stocks here ladies). So, you must prepare for that inevitability.

We do not want to go into the world of investing being over confident. Being over confident will only lead to foolish decisions. This confidence was hard wired into our brains many years ago. As hunter-gatherers we required an exuding confidence. We needed to try and try again or our families would go hungry. This was accomplished through two emotions: pride and regret. When you have pride you attribute the outcome to something you did personally. When you experience regret you attribute the outcome to an outside source that you had no control over. This process boosts confidence and motivates us to keep trying.

If you are hunting to feed your family, this confidence is necessary. If you are investing, this confidence can take away a future of stability for your family. The stock market knows we are over confident. It shows us “great” opportunities all of the time. We take the bait; if we are right, we are brilliant and if we are wrong, we blame bad luck. So, if investing requires the opposite of hunting, we must learn to shun pride and accumulate regret.

For those of you who want to delve deeper into the subject of risk management and position sizing, might I suggest one of the books located on my sidebar to the right. "Trade Your Way to Financial Freedom" by Dr. Van K Tharp is an excellent introductory text on the subject. There are also many more advanced texts and reports that you could find pretty easily.

For the others, below will be a brief version. This is something every investor has the capability of understanding and should take the time to do so.

Do you realize that you can lose 100% of an investment and only be down 1%-5% in your entire portfolio? It's true. You can be entirely wrong on an investment. You can do everything the experts tell you not to do. If that one investment goes to $0, your portfolio will not be adversely affected.

For instance, let's say you have a $10,000 portfolio and you are a long-term investor. As a long-term investor, you can afford to lose around 5% on any one investment and be relatively safe. For the shorter term trader, you will want a smaller number like 1% or 2%. 5% of $10,000 is $500. We have figured out that you can lose $500 on any one investment and not completely destroy your portfolio.

We will now assume that we get into our Wal-Mart position at $55.80. How many shares should we purchase to be on the safe side? To figure this out you would take $500 and divide it by $55.80, which would yield an anwer of 8.96. We can't really purchase 8.96 shares, but you get the idea. This past example is only if you want to be extremely careful and feel you could lose the entire investment. It is not highly recommended.

Usually you will have a stop, a pre-determined selling price, in mind before the purchase. I would place a stop (real or mental) under the uptrending line around $48.65. Now, instead of risking $55.80 per share you are risking $7.15 per share. Divide $500 by $7.15 and you come up with 69.93. We'll round that off to 70 shares. You can purchase 70 shares of WMT for your portfolio and if everything goes wrong, your portfolio will not be affected harshly.

I hope this helps out your understanding of portfolio management a little. Like I said above, there is a lot more information on the subject out there. Go look for it!

Best Regards,

The Soothsayer of Omaha

Oracle of Omaha Spotting

Here is a good post about the good 'ol Oracle of Omaha. I hope you enjoy and learn.

Best Regards,

The Soothasyer of Omaha