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We’re all so happy. Is the “smart” money taking its profits for the year?

This morning my friend, Pete, emailed me:

Everyone is so happy and bragging about how much money they have made this year.  It kind on reminds me of the tech bubble.  Even my son David told me this weekend that he’s up over 60% this year, but he’s smart enough to have gotten out of things like TSLA already.

I always remember what a very successful money manger here in RI used to say on his investment radio program.

SELL when you’re the happiest  about your portfolio.

Today is the first of the month. Most first-of-the months are up. Good day to take some profits?

Berkshire Hathaway reports its latest quarterly earnings this afternoon. I’m guessing it will be up nicely. BRKA shares have lately been weak and could do with a little push.

Fun stuff: Berkshire put out a press release yesterday which began:

Over a century ago, Mark Twain observed “Never pick a fight with people who buy ink by the barrel.” We are about to ignore Twain’s sage advice.
Above their 50-day DMA. My friend Stephen emails me this morning:

It’s rare to see more than a handful of S&P 500 stocks trading more than 12% above their 50-day moving averages, but as we closed out trading today, there were 31 stocks in the index that fit this criteria. As shown below, Xylem (XYL) is currently the most extended stock in the S&P 500 at 23.56% above its 50-day moving average.  First Solar (FSLR) and Chipotle (CMG) are the only other two stocks trading 20%+ above their 50-days.  Amazon.com (AMZN), FedEx (FDX), Google (GOOG), Delta (DAL) and Boeing (BA) are all on the list as well.

Stocks can stay extended for a long period of time, but they don’t stay extended forever.  They can either decline to their historical moving averages, or trade sideways and allow their moving averages to catch up to them.  If the market does run into trouble in the near term, the most extended stocks are definitely at risk of the biggest pullbacks.

AbovetheirDMA

Flyer of the day. Jimmy Chin likes SITO. He is “looking for this stock to start trading up nicely over the coming weeks and months.” Here’s SITO over the past year:

Sito

Twitter versus Facebook? Personally I think Twitter has longer-term a brighter future than Facebook. But Twitter is much further behind in monetizing its business (i.e. earning a profit). This weekend’s Economist has a piece on Twitter. The Economist’s writer had ball with the bad puns. See if you can find them:

Twitter’s IPO
Going cheep?
The microblogging firm’s shares may not be the bargain investors are hoping for

TWITTER is already a social-media star. Now it hopes to become the toast of the stockmarket too. The firm has gradually been unveiling more information about its business. But as it gets ready for its first day of trading as a public company on the New York Stock Exchange, which looks likely to be on November 7th, opinions about a fair price for the shares vary considerably.

The firm has announced a provisional range of between $17 and $20 for its stock, which would value it at up to $11.1 billion. Speculation is rife that Twitter and its bankers could set an even loftier price before trading starts, though as we went to press no change had been announced. If they do push the price higher, long-term investors could get their fingers burned.

Twitbulls point out that Twitter is going public at a time when social-media stocks are all the rage. On October 30th Facebook’s share price, which had already risen by 84% this year, soared in after-hours trading following news that its latest quarterly revenue had hit $2 billion. LinkedIn has seen its stellar revenue growth slow a bit recently, but its shares are still up 95% this year.

Twitter’s boosters also claim that the company deliberately set a conservative initial price range to fuel investor interest in its stock, noting that an internal valuation conducted by the firm in August reckoned its shares were worth $20.62 each at the time. The company has continued to increase its audience, and now boasts 232m users that visit it at least once a month.

Small wonder, then, that some financial folk are predicting Twitter’s stock will fly even if the IPO price is a bit higher than the existing range. Brian Wieser of Pivotal Research Group reckons its shares will be changing hands at $29 by the end of the year. Others are even more optimistic. Doug Kass of Seabreeze Partners Management, a hedge fund, has said he thinks the share price of Twitter could double within its first month of trading and that he would be willing to pay up to $32.50 for its shares. Twitbulls like to point out that Twitter is currently generating about $2.30 of revenue per user. That is much less than Facebook makes from its audience, implying Twitter has plenty of room to boost sales.

But they gloss over an important fact. Unlike Facebook and LinkedIn, which were making healthy profits before they went public, Twitter is still losing money-$134m in the first nine months of this year compared with $71m in the same period of 2012. These losses make it impossible to compare Twitter’s IPO with others using the traditional yardstick of a price-earnings ratio.

Instead, analysts often look at another measure: the ratio of a firm’s proposed market capitalisation at IPO to the past 12 months’ sales. Jay Ritter, a professor at the University of Florida, has calculated this ratio for Twitter using a share price of $18.50, which is the midpoint of its proposed range. Counting in restricted shares and those associated with outstanding stock options, this produces a market cap of $12.9 billion and a price-to-sales ratio (PSR) of 24.1 based on Twitter’s revenues over the past 12 months. That is the third-highest PSR of any IPO in America since 1980 involving firms with significant revenues (see chart).

Shares in the two companies ahead of Twitter in the chart-Facebook and Palm, a now-defunct maker of hand-held devices-fell sharply in the months following their IPOs; and Mr Ritter notes that the top 15 companies in his PSR ranking saw their share prices drop by an average of 5% in the six months after their first day of trading. “A valuation at a high price-to-sales ratio removes a lot of the upside potential for investors in the public market,” he says.

FeedingFrenzy

The challenge faced by companies with high ratios is to generate revenue fast enough to meet investors’ expectations. So far, Twitter has only a microscopic share of the $118 billion a year global market for online advertising. Yet the fact that many people tweet on their smartphones means it is well-positioned to take advantage of growth in mobile advertising. On the other hand the compact nature of its tweets, limited to 140 characters, means that Twitter will find it harder than Facebook to generate ad formats that mint money. And it now faces much stiffer competition from the social network and other companies such as Google in the mobile-ad arena.

Trick or tweet?

So what is a fair value for Twitter’s shares? Aswath Damodaran, a professor at New York University, has built a valuation model that assumes Twitter will scoop up around 5.5% of the online ad market by 2023, giving it revenues of $11.2 billion. His model also posits an operating margin of 25% for the company, which seems plausible given that of other internet firms that have grown fast. Based on his analysis, he reckons Twitter’s shares are worth $17.84 each, which is towards the lower end of Twitter’s current price range. Given the many uncertainties that still dog the company’s business model, a price of around $18 a share seems reasonable.

But investors who like volatility may still want to take a flutter on Twitter’s stock even if the price is somewhat higher. Given all of the hype around the company, Twitter’s shares could spike upwards immediately after its IPO, allowing investors to mint money by buying and selling quickly. So Twitter’s flotation could be a great short-term trading opportunity. But at anything above $18 each, its shares will be a poor long-term investment.

 Finally some sanity in the air. You’ll be able to read books, watch movies and answer emails (though not send them) below today’s 10,000 feet. For more click here.

Apple’s iPad Air goes on sale today. The iPad Mini with the retina display (the one I’m interested in) won’t go one sale until (according to Apple) “later in November,” whenever that is. It will be an iPad Christmas.

The Economist explains: How do spies bug phones?

BugaPhone

Click here.

Another shot at buyng a hearing aid. I keep testing hearing aids. Both cheap and expensive. I haven’t found one that works. My latest experiment is something called the Bean Quiet Sound Amplifier.

BeanAmplifier

I bought a pair last night. Two for $700. There’s a full 30-day money back guarantee. Anyone tried the Bean? Click here.

Visiting New York? Float on by Lincoln Center. Until January 4 there’s an outdoor exhibit of 14 works by L.A. artist Aaron Curry. Come by in the evening. Watch the fountain. Go to the ballet, the movies, the symphony, the opera… Lincoln Center has over 30 stages and is home to a dozen performing companies. We went to the movies there last night. Like all the newer Lincoln Center theaters, the Walter Reade Theater is the most comfortable and luxurious movie house I’ve ever been in. We saw a movie called “Kill Your Darlings.” A true story of the writers Allen Ginsberg and Jack Kerouac at Columbia University in the early 1940s, starring the grown-up Harry Potter (Daniel Radcliffe). Interesting movie. Susan and I liked it.

AaronCurry

More on the Curry exhibit, click here.

The New York Marathon is this Sunday. It will be bedlam. But enormous fun. The City takes on a whole new glow. Bring your umbrellas.

Ouch. From yesterday’s New York Metro:

ChinesePenis

Gentle Italian humor. Click here.

HarryNewton
Harry Newton who had a ball writing today’s column. Have a great weekend.

One Comment

  1. jon says:

    Yang Hu is a strange fellow, usually that’s the
    wife’s job.