The King of The Declining Industries — Part 2, Expanded. Harry’s thesis: It’s hard to find stocks that will rise nicely and consistently — especially before every other investor. However, it’s easy to find stocks that will decline and sell them short — because few investors focus on ailing stocks. It’s not considered “kosher” to be the King of The Declining Companies.” Also called “Master of the Cockroach Stocks.”
But there are profits from selling short. I’m not suggesting that we focus on ailing companies, but that we be aware of them and when we find them, sell them short. Here’s a little framework. Declining stocks fit into these categories of haplessness:
+ Accounting irregularities. The company announces it’s going to be late with its reporting. Or the SEC asks for more information. Or the auditors add mean and nasty words to management’s reports. These are the classic cockroach stock beginnings.
+ Stupid and continuing bad management decisions, e.g. Netflix.
+ IPOs that come out on “nothing” — no (or limited) earnings, no prospects — skyrocket, then fall to earth. Sadly, it’s hard to short over-hyped IPOs, e.g. Zagg Skull Candy (SKUL), Zyna, LinkedIn are classic cases. Look among Internet and technology companies. They often have more marketing than reality. Check out this week’s Economist piece on Internet gold (again). Click here.
+ Broken promises. Best Buy couldn’t deliver promised items over Christmas. Many children (and their parents) are annoyed (that’s a kind word). Ascribe this to incredibly lousy management planning.
+ When you walk into a retail store and find that there’s nothing — not one thing — you want to buy (even if you were rich beyond your wildest imagination.) Remember Sears? Ever walk in and eye the merchandise? It was truly awful. Today Sears said it would close 100 to 120 Sears and Kmart stores and take up to $2.4 billion of charges.
+ Dramatic new emerging strong competition (e.g. the iPhone and Android against RIMM)
+ Slowness and delay in introducing new updated products. RIMM.
+ Huge continuing industry price drops (like solar panels and their impact on FSLR)
+ Excessive parabolic price runups (e.g. gold – see chart here).
+ A really dumb merger, e.g. AOL-Time Warner. HP-Compaq, or Microsoft-Skype. Most mergers are failures, except for the bankers who charge big fees on the deal.
+ When the big player in the industry does poorly. For example, Oracle did poorly. Maybe we should take that as a sign for competitors like Terradata and Computer Associates?
+ The company suspends the sale/divestiture of an ill-performing or non-strategic division.
+ Companies that air their dirty linen and their mistakes in public.
+ Just plain bad CEOs. Cramer gives awards for lousy managers occasionally. Yahoo and AOL often feature. RIMM has lots of lousy managers. HP also had its share.
+ When the founder retires and the “idiot son” takes over, viz. HP and Microsoft. I’m not prepared to write Apple off, yet.
+ Overhyped stocks that rise into the ionosphere.
+ A continuing avalanche of bad press publicity. e.g. Research in Motion.
+ The disguised company. GE is seen as an industrial company, making things like engines for jet planes. But it really is a finance company which earns (or used to earn) most of its profits from lending. When the world of finance fell apart, so did GE. Hence it’s important to understand the public persona and the reality.
Selling short involves timing, just like buying. By the time the cockroaches are in their full visibility, it’s too late. You have to get in (or out) when the first ones appear. Or when you visit that first horrible retail store. Or when you first read about that really stupid management decision.
Good time to buy a TV. Prices have plummeted. I like LED. But they’re all good and cheap. For today’s New York Times story, click here.
Backup. Backup. Backup. I sound like a cracked record. Hugo is 14. He has 350 gigabytes of movies and songs. It’s all on one external hard drive. His Apple computer now won’t recognize his external hard drive. He doesn’t know why. Neither do I. He is panicking.
Why no backup? Because it would never happen, he believed. Well, it did, sadly.
How to get your new, dumb car inspected. Most states won’t grant inspection stickers IF something is “wrong,” i.e. one sensor has gone off.
My friend has a car which has sensors for tire pressure. It’s totally stupid. When the weather is cold, the sensors go mad. When the weather is warm, they’re fine. His solution:
Clear the sensors with the computer. Reboot the car. Drive it gingerly and normally for 50 miles. Then get the car inspected. The computer allegedly has to show “all clear” for 50 miles.
Personally I drive a 2002 Subaru Outback, which has no sensors, no computer and few brakes. But works just fine, if I drive it slowly.
Latest travel tips:
1. Don’t ever put something in the seat pocket. You will leave it. Trust me. You will leave it.
2. Some Amtrak trains have a Quiet Car. It’s often at the front. Pay a red cap $3 to take you to it — before the masses board. Get a window seat.
3. If you arrive early, your plane will be late. If you arrive late, your plane will have left early.
The joys of travel. Abe and Esther Goldberg were flying to Australia for a two week vacation to celebrate their 40th anniversary.Suddenly, over the public address system, the captain announces, “Ladies and Gentlemen, I am afraid I have some very bad news. Our engines have ceased functioning and we are going to attempt an emergency landing. Luckily, I see an uncharted island below us and we should be able to land on the beach. However, the odds are that we may never be rescued and we will have to live on the island for the rest of our lives.”
Thanks to the skill of the flight crew, the plane lands safely on the island.
An hour later, Abe turns to his wife and asks, “Esther, did we pay our charity pledge check to Beth Shalom Synagogue yet?”
“No, sweetheart,” she responds.Abe, still shaken from the crash landing, asks,”Esther, did we pay our United Jewish Appeal pledge?”
“Oy no! I’m sorry. I forgot to send the check,” she says.
“One last thing, Esther. Did you remember to send a check for the Synagogue Building Fund this month?,” he asks.
“God forgive me, Abie,” begged Esther, “I didn’t send that one, either.
“Abe grabs her and gives her the biggest hug and kiss ever in their 40 long years of marriage.
Esther pulls away and asks him, “So, why do you kiss me?” Abe answers, “They’ll find us!”
Harry Newton who wonders why he’s so lucky with his wonderful family. I suspect Susan engineered it all. She’s good. I’m glad I married her.
The tire sensors are truly annoying since their warning lights come on more than they stay off, especially in areas like mine (Colorado) where winters are gorgeous but cold. However, most states have realized that the tire sensors have absolutely nothing to do with safety or the emissions of the vehicle thus not “failing” a vehicle during inspections. On ANY given morning in the winter, the tire sensors on my vehicle are “on” showing “low tire pressure” because of the cold air. By the time I get to my office (5 miles away) the heat from the friction caused by my driving has built the tire pressure back up to normal and the low pressure warning light is off. All your friend has to do is drive his car and everything will be back to normal in a matter of a few minutes. On the “glass is half full” side, I was driving my daughter's Outback recently when I ended up with a flat tire. Because I was on the highway driving 65MPH I didn't get any warning until I felt a drag and heard noise coming from the rear. I pulled over to see that the passenger side rear tire was literally shredded. If the Outback had one of those sensors, I could have been warned as soon as the tire started losing pressure giving me time to pull over before doing further damage. The difference? A $100 tire bill vs. a $9.00 flat repair. If my daughter was driving by herself, she probably would have damaged the wheels while driving to the next exit resulting in additional costs.