Tag Archives: investing

Focusing On Revenue Is A Great Idea! But Do Not Forget About Stabilized Profit

I was feeling a bit sick this morning, so I stayed in bed and turned on CNBC. I NEVER watch CNBC, unless I am at home in bed sick. And it usually makes me feel worse. They were interviewing Reed Hastings, the CEO of Netflix (NASDAQ: NFLX ), who has clearly done a great job guiding that company. In 2005, Netflix did $682 million in revenue, and this past year, it did $5.5 billion in revenue. Quite an accomplishment. Yes, there are a lot of competitors out there, but he has clearly done a great job. So he was talking about how having negative free cash flow and very low profit is proof that the company is in this for the long run, and he is 100% correct. We are actually starting to operate our business the same way, as I said in a previous post about Dell’s new approach to growth. And this is exactly what you would want to see as an investor. HOWEVER, the problem with this is that most investors are not smart enough to do the trickle-down analysis of what this means. Amazon (NASDAQ: AMZN ) has the same issue, and it’s something I have lamented about over and over. What a good investor SHOULD do is analyze what the company would have made had it not reinvested. What would there profit be if the company stopped reinvesting and just operated normally for normal growth? That is exactly what you need to do to analyze the value of a business. Because at the end of the day, what is happening now is that with no profit and negative free cash flow, an investor’s eyes are growing wider and wider saying “The profit potential is infinite!” Clearly, it’s not infinite. Clearly, a company with $100 billion in revenue can’t make more than $100 billion in profit, which is also impossible. If Netflix, on a normalized basis, has 15% in profit, its $5.5 billion in revenue would lead to around $825 million in bottom line profit, and at 20 times earnings – which is high based on history, but we will give it that due to just me being overly optimistic – that’s a valuation of $16.5 billion. Now, I am not saying that its profit margin is 15%, because I know it to be. I am purely speculating. But Netflix is currently selling for a valuation of $47 billion. Hmmm. So, based on 20 times earnings, that’s a bottom line profit of $2.35 billion, which is over 42% margin. Not likely. The same goes with Amazon. In the company’s best year ever, it did 3.5% or so in bottom line profit margin. This last quarter, it made $75 million after making $500 million on its cloud-based AWS business, and that was on total revenue of over $25 billion. Not exactly something that I deem to be worth more than Wal-Mart (NYSE: WMT ), which has almost $500 billion revenue per year. Either way, the point is that valuing something today for future potential is fine, but you also have to be realistic about it and realize that you have to let things grow into what you hope them to be, without overpaying today for that. Make realistic assumptions about their profit margins based on other businesses in their markets and their gross margins. It’s too easy to get stuck in a market like this assuming the best will happen, since it has for the last 6 years. It is a game of musical chairs, and when the music stops – which it will – don’t be caught looking for a seat.

Russia: Surprise BRIC ETF Winner So Far This Year

Russia has hardly raised a toast to its economy in nearly two years thanks to the ban imposed on the nation by the West following its Crimea (erstwhile Ukrainian territory). Plus, the acute and persistent crash in oil prices in the second half has wreaked havoc on Russian stocks and ETFs in the last one and a half years. Apprehensions of significant economic losses and a five-year low GDP growth in 2014 led investors to excuse themselves from Russia. As a result, the biggest Russia ETF Market Vectors Russia ETF (NYSEARCA: RSX ) lost 42.3% in the last two years and 20.7% in the last one year (as of November 2, 2015). The economy has hardly shown any sign of a meaningful turnaround with its GDP shrinking 4.3% year over year in Q3. Its economy is also predicted to be contracting 3.3% in 2015. Yet RSX has managed 16.5% gains so far this year on the back of its dirt cheap valuation. If this was not enough, following the October Fed meeting, which once again sparked off the December rate hike talks, gave this Russia ETF a boost to emerge as a winner in the BRIC ETFs pack, per barrons.com . Needless to mention, emerging market investing is always threatened by Fed policy tightening as it might lead to a cease in cheap dollar inflows. But Russia ETFs have defied this norm this time while the other pillars – Brazil, India and China – followed. Below we highlight the last five-day performance of BRIC ETFs, which shows that RSX and small-cap Russia ETF Market Vectors Russia Small-Cap ETF (NYSEARCA: RSXJ ) were up 0.9% and 1.5%, respectively, while large-cap India ETF INDA and the China ETF MCHI lost about 2.9% and 2.3% and Brazil ETF EWZ added 0.6%. What’s Behind This Optimism? The main driver was the central bank meeting held at October end, wherein Russia’s central bank maintained its key interest rate, but hinted at rate cuts in the coming months as inflation is showing signs of abating, though slightly at the current level. As per Bank of Russia , the annual pace of inflation is projected under 7% for October 2016 and at 4% for 2017. The bank indicated that the reasonably tight monetary policy and soft domestic demand due to reduced expansion in the nominal income of the population will curb inflation. Along with this, the backing off of tanks and weapons by government troops and separatists in eastern Ukraine strengthened the bet over a stable truce. This should in turn lessen international sanctions against Russia, per Bloomberg . Also, the oil price recovery in early October (as Russia is a major oil-exporting nation) and weakness in the greenback last month lent this woe-begotten economy and its currency and stocks a nice bounce. Ruble gained over 23% as of November 2, 2015 from this year’s low hit in May. Best Performance in BRICS While Russia ETFs are roaring back on speculations of sooner-than-expected rate cuts, Chinese ETFs have seen a tumultuous year on slowing economic growth and overvaluation concerns. India ETFs also haven’t been able to live up to investors’ expectations as pro-growth reforms are taking time to turn into reality. And Brazil has its long-standing economic issues of slowing growth and rising inflation. Economists predict that Brazil’s economy will shrink 3.02% in 2015 and 1.43% in 2016. Brazil is nearing the worst economic debacle in 25 years. So far this year (as of November 2, 2015), ETFs on other BRIC nations – Brazil (NYSEARCA: EWZ ), India (BATS: INDA ) and China (NYSEARCA: MCHI ) – are down 36%, 4.3% and 4.9%, respectively while Russia ( RSX ) is up 16.5%. Thus, investors might consider betting on the Russian equities ETF space on this nice price surprise. As a caveat, they should note that the economy is still soft and might be vulnerable to the Fed’s interest rate policy. The U.S. central bank will likely hike its key rate by this year-end or early next year putting many emerging markets including Russia, at risk. Oil prices are still to regain the lost ground. So, ample downside risks stay hidden in this investment. RSX, iShares MSCI Russia Capped ETF (NYSEARCA: ERUS ), and SPDR S&P Russia ETF (NYSEARCA: RBL ) have a Zacks ETF Rank #4 (Sell) each with a High risk outlook while RSXJ carries a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook. Original Post

3 Strong Buy Wells Fargo Advantage Funds

Wells Fargo Advantage Funds has over $121.5 billion (excluding money market assets) of assets allocated across a wide range of mutual fund categories. The company manages more than 110 mutual funds, which include both domestic and foreign funds, asset allocation funds and fixed-income funds. The Wells Fargo fund family boasts, “Each fund is guided by a premier investment team chosen for its focused attention to a particular investment style. There’s a fund to meet the investment goals and risk tolerance of almost any investment portfolio.” Meanwhile, Wells Fargo (NYSE: WFC ), the owner of Wells Fargo Advantage Funds brand, is one of the four largest banks in the U.S. and has a legacy spanning 150 years in the financial services sector. It is a highly diversified financial services company with operations spanning the globe. In 2010, the Boards of Trustees of Wells Fargo Advantage Funds and Evergreen Funds had approved the merger of the fund families to create the new fund lineup under the Wells Fargo Advantage Funds brand. Below we share with you 3 top-rated Wells Fargo Advantage Funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Wells Fargo Advantage Pennsylvania Tax-Free A (MUTF: EKVAX ) seeks to provide tax-exempted income. EKVAX invests a large chunk of its assets in municipal securities that are expected to provide interest income free from Pennsylvania individual income tax and federal income tax, which also include federal alternative minimum tax (AMT). However, EKVAX may invest a maximum of 20% of its assets in municipal securities that pay interests, which are not exempted from federal income tax. The Wells Fargo Advantage PA Tax-Free A fund has returned 2.6% over the past one year. Robert J. Miller is one of the fund managers of CSGEX since 2009. Wells Fargo Advantage Small Company Growth A (MUTF: WFSAX ) invests a major portion of its assets in equity-related securities of small-cap companies. Companies with market capitalizations similar to those included in the Russell 2000 Index are considered small-cap ones by the WFSAX advisors. WFSAX is expected to invest 100% of its assets in the Small Company Growth Portfolio. The Wells Fargo Advantage Small Company Growth A fund has returned 3% over the past one year. As of September 2015, WFSAX held 126 issues with 1.75% of its assets invested in SS&C Technologies Holdings Inc. (NASDAQ: SSNC ). Wells Fargo Advantage Core Bond A (MUTF: MBFAX ) seeks total return through growth of capital and income. MBFAX invests the lion’s share of its assets in bonds that are rated investment-grade. MBFAX may invest a maximum of a quarter of its assets in asset-backed securities, which are not from mortgage-backed category. Not more than one-fifth of MBFAX’s assets are expected to be invested in foreign debt securities that are denominated in dollar. MBFAX is expected to maintain a dollar-weighted average effective duration of not more than 10% of that of fund’s benchmark. The Wells Fargo Advantage Core Bond A fund has returned 1.6% over the past one year. MBFAX has an expense ratio of 0.78% as compared to the category average of 0.82%. Original Post