In all companies there is both good news and bad news circulating around them, most of us want to hear the good news aspect. The company had a good quarter, there are headwinds, but the management team is dealing with it and the company should be able to progress in the correct manner. Every once is a while, the bad news seemingly is more important, for example Tesla. The company has been a high flying one and is founder Elon Musk has been the leader in electric cars, solar panels, and rocket ships – there is a wonderful story. In a column by Brandon Kochkodin  of Bloomberg News, Tesla stock is taking in on the chin for trailing expectations and facing new investigations.

In all high flying stories, there are short sellers who expect the stock to fall but if the company meets or beats expectations, a company such as Tesla can be worth more than GM in stock market valuation. Recently Tesla has been not beating expectations as production of cars falls below – they were suppose to make 2,500 Model 3 (the $30,000 electric vehicle) a week, production is running at below 1,000 or 975. This can be due to a number of factors – one is shoppers with great intentions are not buyers or it could be due to logistics in running a complex production line. We do not know at the momemt.

We do know there was an accident with a Tesla and maybe its driver assistance system Autopilot was on. If it was on and the driver did not watch – these are early adopters and maybe the driver was silly. It could have been a regular vehicle accident which happens to every make of car and truck.

One of the measures to examine the vehicle company is the bond market because all manufacturers must sell bonds to produce their products. If the company is doing well and the interest and principal are almost a guarantee the bonds trade at or above par. When there is worry, interest rates go up and prices for the company’s bonds go down. Tesla is in this situation. The 5.3% bonds are trading at 87.50 for a yield of 7.5%. If you love Tesla that is a great deal, if not that could be a warning sign.

Tesla spends about $4 billion a year on its operations, while they have a year’s operation in cash or equivalents, some time during the year they will need more money. If sales are up and production is moving – the ride can continue.

Linking to dividend paying stocks, for the most part no news until the quarterly meeting is generally good news. Every company has something which can affect its performance and you need to assure yourself whatever it is – the company can manage or has enough cash in the bank to whether the storm and continue.  One question you can ask the President is what keeps you up at night or your biggest worry?

There are more questions than answers, till the next time – to raising questions.

In Las Vegas the Wynn Resorts dominate the skyline and coupled with Steve Wynn’s personality – he was consider Mr. Las Vegas. Then the me too movement happened and it was seen Mr. Wynn besides being a wonderful casino and hotel operator could not pass a young woman working for him without trying to have some sort of sexual relations with him. Mr. Wynn was a big funder for political parties which dropped him and he left the role of Chair and President of Wynn Resorts. The final installment was to sell his shares the buyers were T. Rowe Price and Capital Research and Management two long term shareholders bought 8 million shares between them. The surprise was Galaxy Entertainment Group bought 4.9% of Wynn Resorts.

Galaxy is controlled by Hong Kong billionaire Lui Che-Woo in an article by Christopher Palmeri, Daniela Wei and Lisa Du of Bloomberg News noted Galaxy is the largest casino operator in Macau and this transaction could affect global gambling. It also positions Galaxy in a manner to takeover Wynn down the road, if desired. Macau which is the world’s largest gambling hub is expected to unveil in the coming months how it will review and give out casinos licenses. Galaxy is building a $500 million resort in the Philippines and wants to build in Japan as the company has legalized gambling.

If Galaxy was to go for control of Wynn it would cost in the range of $8.7 billion.

Linking to dividend paying stocks, sometimes everything is good and then it changes. In the case of Wynn, Mr. Wynn was respected, often talked about his managment style including respect for all his employees (you can see some of his talks on You Tube) and was considered the go to person in Las Vegas and elsewhere. Then the sexual allegations charges happened and existing management had to deal with succession plans quickly in order to ensure the company was not running on one spot. There is no doubt Mr. Wynn will be missed, however the company has moved on and can continue to operate and have its licences renewed.

There are more questions than answers, till the next time – to raising questions.

The President has trade deficits on his mind and wants to fight the whole world to lower the deficit. At one time, this was an acceptable thing to do, however in the 2000’s it is more complicated. A column by Adam Jourdan of Reuters focused on Apple. Apple is one of the most successful US companies – it is innovative, sells good products, has a very loyal customer base, changed music listening, brought back $200 billion in lower taxes from a gift by the President and the list could go on of the good things it does.

Apple designs iPhones in the US but produces them in China or the Far East. The latest phone is iPhone X a company called IHS Markit estimates its components cost $372.25. Of that $110 goes to Samsung Electronics in South Korea for supplying displays. Another $44.45 goes to Japan’s Toshiba and South Korea’s SK Hynix for memory chips. Other suppliers from Taiwan, the US, and Europe take their cuts. The phones are put together by Foxconn but that is only 3 to 6% of the cost of manufacturing.

Apple shipped 61 million iPhones to the US last year. Researchers and Counterpoint and IHS Markit show spending $258 on average to make iPhone 7 and 7 Plus. This means the iPhone 7 series added $15.7 billion to the trade deficit with China or about 4.4% of the total. That was 22% of the $70 billion in cell phones and household goods the US imported from China.

To only blame the Chinese is wrong. If you begin to add in stores such as Wal-mart and Dollar Stores where many of us have and continue to shop, trade deficits are a problem however solving them is equally a challenge. Any who watches Shark Tank will listen to the Sharks at some point say one of your high costs is manufacturing I have connections in China to lower than cost.

Linking to dividend paying stocks, companies take advantage of the existing supply chains, while politicians might make noises it is very difficult to change them without affecting the bottom line or profitability of the S&P 500.

There are more questions than answers, till the next time – to raising questions.

 

In an article by Conor Dougherty of the New York Times News Service about Reno, Nevada, the growth of Reno is a direct result of increases of house prices in California. Because of the growth of Silicon Valley prices of homes have increased in the San Francisco area and people are willing to commute longer. One commute is 4 hours north east to Reno, Nevada. Nevada depends on gambling and tourism and has traditionally had low taxes. People are at the stage in their lives and selling off homes in California and moving where homes are less expensive and the new owners have a nest egg to settle into their communities. What is good for a few is not so great for the many as more than 100,000 people from California have moved. Cities such as Reno have seen home prices increase and more importantly services in the community stretched.

Linking to dividend paying stocks, middle income people vote with their pocket books. This means if they can they will find an easy method to do something or move to different alternative. For most of them as a group, as long as the problems do not happen to them they feel they are okay. When it happens to them, they begin the process to move. Sometimes that is a good thing, sometimes it just means other problems where they move to. Due to have higher disposal income, companies pay attention to what middle income people do.

There are more questions than answers, till the next time – to raising questions.

Near the end of March, Facebook was hit with a probe around 3rd party use of its data. More and more companies collect data to analyze which is a good thing. If you look towards the President of the US much of his decision making is based on gut feel; (as long as his instincts are good, it does not matter but consistency will not be part of the decision making); other companies made decisions based on accepted norms or what they thought accepted norms are; and now all companies have the ability to make decisions based on the information they collect and analyze. There is nothing wrong with that.

The next step is try to use the data to anticipate their customers to make the correct decision for whatever they might buy. In the world of politics – all parties know who can vote, they try to determine past voting habits and although the voting itself is secret, the intentions for many of the voters are generally known before hand. If someone is a member of the two big parties then it is safe to say they will likely vote for one of the two big parties. The trickier aspect is the swing voter? What will it take to ensure the person votes and will vote one way or another? The company Cambridge Analytica is one of many companies doing similar thing but they happen to be in the news because they tried to move the vote towards the President. The company paid Facebook a fee to use their data to focus on swing states to see patterns in what people liked and did not like. Whatever they liked, a message was tailored to them until the day they voted. If swing voters voted the way the buyers of the data wanted, then yes there was a secret ballot or democracy but people voted the right way. One would think the opposition will catch up for the midterms and the next election. So yes there is pressure on individuals but both sides do the same thing.

Linking to dividend paying stocks, Facebook is in the news because people were surprised it was so easily to access Facebook’s data. Every company collects data, some you give willingly, others not so but people think their information is somewhat protected. The Facebook news suggests all companies need policies on how the data on people is used outside of the company. Facebook stock went down, it will need to show what measures they are putting in place to satisfy people’s data concerns.

There are more questions than answers, till the next time – to raising questions.

In World War 1, after Germany conquered much of Europe, the country went after England, England is an island and Germany had the advantage of the latest technological weapon – the U Boat or submarines. In today’s world we think of submarines as nuclear capability but for Germany having gained the territories around England quickly sent its U boats to ensure supplies coming to England did not arrive. According to the book by Joseph A Williams titled The Sunken Gold published by Chicago Review Press, Chicago, 1917 the u-boats sunk between January and April 1917 2,360,000 tons of Allied and neutral shipping. Since the war began in 1914 the Germans had sunk 4 million tons. Clearly the u boats were having an effect that could have turned the war.

The British tried everything they could but one of the successes was the new abilities of divers to dive to the bottom of the sea and find wreckage. In the past, people waited for the wreckage to come to shore and then the goods and supplies sometimes stayed in the town, sometimes it was sold far and wide. With the diving, there need to be start and the start was a ship which was sunk in Northern Ireland carrying gold going to New York. The Treasury put pressure on the Navy to salvage the gold and thus divers were useful. After some but not all the gold was salvaged, the divers were sent to go into German wrecks – some have been destroyed, some hit a mine, but what was useful were the codes inside the locked boxes. The codes were sent to Room 40 or the WWI code breakers, if they could figure what the Germans were up to, they had the ability to both send out false information and change their tactics. The Germans constantly changed their codes which meant the brass at the Navy was interested in any new ship that sunk.

In the book the central figure concerning diving is Captain Guybon “Guy” Damant and after the war he and his team went back to Northern Ireland and eventually found 95% of the gold that went down on the HMS Laurentic. Somewhere in the shifting sands at the bottom of the sea are 25 bars of gold.

Linking to dividend paying stocks, new technologies means different ways to do things and the leader always has the advantage while others play catch up. In the case of submarines, the Germans for 3 years had a significant advantage till the British began to catch up. Now days it seems the time to catch up is measured in months not years, but eventually organizations have to catch up or always be behind.

There are more questions than answers, till the next time – to raising questions.

When we look to the future, electric cars will play a larger role and that is good for the  environment. One of the leaders or at least well known companies is Tesla and its President Elon Musk. According to Chris Horwood of Orbis Investments inn 2009 it was a nice idea as costs were about $900 a kilowatt hour, today the costs have fallen to $250/kwh. As prices continue to fall the cars are within more car buyers.

If you had invest in Tesla in 2009 IPO the company has since tapped over $13 billion in equity and debt and the price of the shares have increased. That is a good thing.

In the stock market there are many alternatives and as an investor you job is to compare and contrast alternatives. One method is to compare Tesla’s market value and other fundamentals to determine which company is better to buy.

Tesla accounts for 6% of the market capitalization of the top 20 auto makers but less than 1% of the book value, sales and gross profit. To match the others it would have to grow 700%. Can it do it, maybe?

At the moment the best selling electric car is made by Nissan called the Leaf. It has more shipments that all of Tesla combined but Tesla trades at 15% more than Nissan. in addition, one of the best automobile manufacturing companies is Toyota. The other large Japanese company Honda has 12 times the sales, 13 times the gross profit and 14% the tangible book value.

Linking to dividend paying stocks, Tesla is an exciting young company but it is the best alternative? Only time will tell but the major Japanese companies are very good at manufacturing, have an excellent distribution dealerships and are profitable. When you consider the alternatives, sometimes decisions are changed.

There are more questions than answers, till the next time – to raising questions.

 

In many situations, many people have checklists to ensure things get done and there is some sense of order. It does not mean there are changes, but at least the road map is available. George Athanassakos is a Professor of Finance and the Ben Graham Chair in Value Investing at Western University in London. He offers a checklist, note his has a bias towards value investing. You can use some of it, all of it, but it important before you make a decision on what to buy, you have an idea of what the outcome should or could be besides make more money.

1. Understand the business and strategic positioning of the company. Is the company attractive in terms of how well it is positioned? What is the competitive situation in the industry and how does it fit in? Who are the key players and how does the company compare with dominant players? Do you understand the business model? What is the company’s business risk?
2. Understand the company’s profitability and trends in the industry. Is the company’s operating margin high and stable? Does the company have a moat to protect those high margins and profits?
3. What is the company’s balance sheet strength and financial position relative to the long-term? Is debt comparable to other companies or higher or lower? Is interest coverage at least 5 times? Does the company have the cash flow to pay off debt as it matures?
4. How good is the management? Compare and contrast other companies are they better or worse? Does management seem to understand the company’s business and dynamics? Are they non-recurring charges? Is the company a good operator? How excessive is the pay package? What is the succession planning?
5. Has something happened to make the company stock price to do down? Was that a bad quarter or something more? Are activist shareholders sniffing around the company?
6. What is the company’s valuation? Does the stock seem undervalued? Looking at the Price/Earnings Ratio or the Price/Book Ratio is a good starting point. The numbers ideally should be less than 13 times or 1.2 times respectively.
7. Are they any value traps? A value trap is one that has all the characteristics of being inexpensive but the stock price does not go up and may even go down. This could be related to the fundamental business has changed The industry is seen as a dying industry or one that is going through many changes. (check out Clayton Christensen of Harvard on You Tube – review the steel cycle industry.
8. Und

The checklist will help you to determine when to buy and sell. As the data changes on the checklist you will know whether to hold or find alternatives.

Linking to dividend paying stocks, at the simplest if you buy a dividend paying stock you most important checklist is the company profitable and can continue to pay the dividend? If yes then you can hold, if not there are alternatives but which other good company should you pick? The checklist or doing your homework is very useful.

 

One of the mysteries of the world is the largest 3 pyramids – how did ancient people built it? It is an enduring mystery for another of reasons – one we all believe we are in the smartest and best society – could we do it? no one knows. The second reason is of all the records left by ancient Egyptian world – there are no records of how the pyramids were built. This means there are guesses – some off the wall, some seemingly accurate but not one is the answer.

In a book called How the Great Pyramid Was Built by Craig Smith published by Smithsonian Books, Washington, DC, 2004. Mr. Smith worked for one of the large engineering construction firm. Over the years, he was interested in the mystery until one day while doing his day job, thought why not prepare the same principles of construction management as he was doing? Mr. Smith had access to his company’s software and using research and best estimates began the journey to discover what would be needed and when. Mr. Smith began his construction logic diagram and began to fill in the numbers. Why that site? where did the blocks come from – how would they be moved? what does the site tell you. The Egyptians moved blocks from a nearby quarry and from other quarries by constructing a canals and a harbor. As Mr. Smith was filling it his program – the picture began to unfold. Mr. Smith believes ramps were made until midrise of the pyramid and then they were pushed up. In his book he calculates the number of people needed and comes to the conclusion it was do able.

Linking to dividend paying stocks, how the great pyramid was built is a great example of investing. There are many things we do not know, but we do know some elements. With those elements we can forecast what should happen under reasonably normal circumstances. There will be unknowns which means as an investor trying to keep your decision making simple is a good thing. For dividend producing stocks – the big question is will the dividend be paid. Yes then can it raised or what is the margin of safety and other questions come. If you believe because of competitive pressures the answer is no, then move to alternatives. This is the reason why you need to do some homework to know what is good to move to, if and when you decided to change your allocations.

There are more questions than answers, till the next time – to raising questions.