Analyst Predictions and Stock Price

GoogleThis morning Google is up on an analyst updating their target price to $700/share from $600/share. The analyst also highlighted Google’s future business potential.

I have noticed that often times an analyst upgrade or a when a prolific investor starts buying a stock, it becomes a self-fulfilling profecy.

Essentially, the analyst upgrade or the prolific investor can often make the price of the stock hit the target price or rise simply because they say it will. Many investors tend to gravitate towards stocks that other “authorities” have suggested are good ones to buy.

However, if the analyst or prolific investor proves to be wrong over the long term, the stock will sink back to previous valuations, which I have seen happen.

One example of this was with Pier One. I bought in thinking at the time their problems were short term and took advantage of the huge selloff due to what I thought was an over reaction to a couple poor quarters. Apparantly Warren Buffet felt the same way as he also bought in shortly after I did and this shot the price up quite a bit when people found out. However, the problems turned out to be more than Buffet or I thought and the price went back to down and continued further down below what we bought our shares at.

When I’m looking for new investments, I keep a list of all the companies of which I’m a customer. I perform my own analysis and research of a company and if I like what I see and I also see that the company passes by the analysts or other prolific investors, I will consider that as further validation of my research and most likely consider the company for my next purchase.  However, I do not buy into a company just because someone else does or says I should. I have done that before and have been burned.

Two examples are AOL Time Warner and Kmart. I bought those years ago as they were rated buys by popular investment magazines at the time. I thought they would be good ways to diversify my own picks. They both turned out be two of my biggest losers. AOL fell to half of what I paid and Kmart went bankrupt meaning I lost my entire investment. Luckily, both of these were small investments in comparison to my whole portfolio, but the lesson was definately learned. Never blindly trust a stock analyst or prolific investor as they can be wrong.

In the case of Google, as a shareholder I’m glad that analysts are raising the target as it has already caused the price to rise and it probably will continue, but I do think that $700 in the short term is quite rich for the company and I think even at the current price, it may be wise to wait for a pull-back or for the next earnings release before putting more money into it. That is my personal opinion and I could be wrong.

Full Disclosure: I own shares of Google.

Monitoring and Adjusting Our Portfolio

Over the last couple months I have spent a lot of time monitoring and adjusting our investments as the market has been so volitile and uncertain.

I trimmed back on anything financial or related to financial.  For example I sold positions in Goldman Sachs, Morgan Stanley and Discover.  I also reduced or sold some positions that have appreciated a lot and where the companies are really over-valued at this time, over-valued stocks are most likely to be knocked down.  If this happens with some stocks we hold, I will most likely be a buyer again once they are at under-valued price.

I would suggest now is a good time to be more defensive.  Stocks like Berskhire Hathaway, Pepsi, Johnson and Johnson, Proctor and Gamble, etc. are good and safe investments right now.  Silver is also a good bet with the rapidly declining dollar over the last few months.

Full Disclosure: I own shares of Pepsi, Berkshire Hathaway and I hold investments in bullion silver.

Discover Spinoff from Morgan Stanley

DiscoverMorgan StanleyOn June 30 Morgan Stanley (MS) will be spinning off it’s Discover Financial Services business to shareholders.  I believe this poses a great opportunity for investors as Morgan Stanley, like it’s peers in the investment services industry, is quite undervalued.

However, credit card companies like Mastercard and American Express are commanding good premiums for their shares.  Therefore, once Discover is it’s own publically traded company, it’s shares should rise to meet it’s peers valuations.

Discover should be able to increase earnings as independent company as there won’t be the conflict of interest when getting banks to distribute cards any longer.  Many firm/banks didn’t want to deal with Discover because the parent company Morgan Stanley is a competitor of theirs.  This won’t be a problem now.  Also, being independent should unlock the entrepreneurial spirit in the company.

There is also the possibility that another firm may want to buy Discover, especially if the price doesn’t rise significantly right away.

After the spinoff, keeping Morgan Stanley is still worthwhile, even though you may not see much appreciation in their stock for a while as the market has been keeping them and their peers down for some time, but holders should be rewarded eventually.

I grabbed a few shares yesterday.

Full Disclosure: I own shares of Morgan Stanley.

Goldman Sachs Creates Own Private Trading System

Goldman SachsGoldman Sachs (GS) has created their own private trading system called Goldman Sachs Tradable Unregistered Equity system or GSTRuE to compete with the pubic trading system. This will provide a great alternative for companies who want to raise capital but don’t want the regulatory and disclosure requirements that come with a public listing.

NEW YORK (Reuters) – Top IPO underwriter Goldman Sachs Group Inc. (NYSE:GS – News) this week launched a platform allowing an exclusive club of big investors to trade unregistered, privately placed securities, in the latest challenge to U.S. equity markets.

Last year, according to Nasdaq, $162 billion of capital was raised through unregistered private placements compared with $154 billion through IPOs, which are registered with the Securities and Exchange Commission.

This should be a great opportunity for Goldman Sachs.

However, under SEC rules, companies can sell securities without registering them as long as issues are limited to qualified institutional buyers, investors with at least $100 million of assets, and there are no more than 499 stockholders. So this means that the individual investor has no chance of direct participation.

This is most likely due to the public system being afraid of losing all their business to a better private solution… much like how the USPS won’t allow Fedex or UPS to deliver first class mail.

However, you may of course benefit from the system by owning Goldman Sachs shares and I’m sure there will be publically traded entities or ETFs that will trade in securities within the private system.

Full Disclosure: I own shares of Goldman Sachs and I am considering adding to my position.

A Defensive Investment for Uncertain Times

Berkshire HathawayWith the Dow, Nasdaq and S&P 500 all hitting new highs on a regular basis, I’m starting to get more defensive in my investing.

While my goal is to always seek out the best investments at the lowest cost, when the market begins to look like it could be peaking and getting ready for a fall I want companies that will most likely survive the fall with little damage or may even thrive in a market pullback or even a recession.

Usually, these kinds are companies are diversified conglomerates and consumer staples such as Johnson and JohnsonPepsiAltriaKraft, or GE as no matter what happens to the economy people will continue to eat and buy the everyday necessities that these companies provide. Also, these kinds of companies have much global exposure, so if things are bad here in the US, their international operations will pick up the slack.

However, there has been one company that I’ve always considered, but never pulled the trigger to buy and now it just feels right and that company is Berkshire Hathaway, the company run by billionaire investor, Warren Buffett. Not only is Berkshire Hathaway a diversified conglomerate, but it has interests in many consumer staples. There are also many other reasons to like Bershire Hathaway. Here are a few…

  • A very long record of steady growth.
  • The most successful investor ever, Warren Buffet, running the company for only $100,000/year. A real bargain! Much better than what you would pay a mutual fund manager, but with the similar benefits of buying into a mutual fund.
  • Management’s pay is tied to the performance of the stock, meaning that they have a strong interest in seeing the stock increase in value.
  • Management has had a long history of honesty, integrity and frugality.
  • Berkshire’s holdings are strong and divisified.
  • Berkshire’s main business of insurance, which includes Geico (of which I am a customer), produces large floats (which is the cash remaining of insurance premiums paid after all claims are paid). The float is used by Buffett to purchase more great companies.  The best part about the insurance business is it’s a business where the customer pays and hopes to never receive it back!
  • Buffett is great to picking great companies with distrissed prices. So, any downturn in the market will provide him more opportunities to make great deals.
  • As mentioned earlier, when there is market downturn, investors usually sell riskier investments and put their money in safe investments such as Berkshire, which should automatically increase the price of the stock as demand increases.
  • And best of all, Berkshire is currently undervalued! The stock is currently undervalued by 5-12%, by conservative estimates.

The negative about Berkshire for a lot of people is that the actual cost per share is quite high. Berkshire Hathaway Class A shares go for $108,351.00 and Class B shares go for $3,604.30. Buffett has chosen to not split the shares because he wanted real investors to own share, not traders.

This also helps keep the price stable. He did introduce the Class B shares a while back which does make it more affordable. The only real difference between the two is that Class B shares don’t have voting rights and Class A shares can be converted in 30 Class B shares, but not the other way around. This keeps the price ratio 1/30 most of the time.

There are other companies that are similar, where the CEO runs the company in a similar manner as Buffett runs Berkshire. These are Sears HoldingsLeucadia National Corp, and Markel. All three have well known investors running the company that seek to increase revenue’s by reinvesting excess revenue generated by the core businesses. They also invest in a similiar fashion as Warren Buffett and seek to emulate Berkshire in various ways and their prices per share a lower than Berkshire.

I currently have all three on my watch list and am waiting for a good entry point.

Full Disclosure: I own shares of Pepsico, Altria, Kraft and most recently I initiated a position in Berkshire Hathaway (Class B shares).  Also, I am a Geico customer, which is fully-owned by Berkshire Hathaway.