Street Smart

By Jon Quast - August 7, 2012 | Tickers: AAPL, BAC, MPC, SIRI, ZNGA | 0 Comments

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Hindsight is 50/50.  In the rearview mirror you can always look back and see stocks you didn’t invest in, and are glad you didn’t, and stocks you didn’t invest in, and wish you would have.  (Did you get my 50/50 joke?  sigh...never mind it wasn't that funny)  I first got into the stock market about 6 years ago.  Basically, I didn’t understand the stock market, and I thought what better way to figure it out then to buy some shares in some companies to see how this whole thing works.  Six years later I still manage a small portfolio, and my investing IQ is way up from where I started.  In this article I want to share the most painful trades I didn’t make, and the lessons I learned from them.

Bank of America

The year was 2009.  I, like many others, had been watching in unbelief as half of the Dow Jones value faded away.  Among the leading losers:  Bank of America (NYSE: BAC).  The share price went from lofty $40 highs to the gutter dipping below $3 in March.  I knew that, unless there was a run on the bank, Bank of America would be fine.  Pessimism had driven the stock that low.  I said to my wife “I’m going to drop $1,000 in BOA’s stock.  “Do whatever you think is best,” she replied.  Well, before I could hit the trade button, fear got a hold of me as well and I didn’t execute.  I felt like a loser when I watched the price recover into the high teens by August of that year.

I may be out, what is for me, a significant chunk of change.  But I’m really ok with that because now I’m smarter.  Here’s the lesson I learned from Bank of America’s crash and subsequent recovery:  Wall Street sometimes over-punishes a company creating a golden investment opportunity for the rest of us.  Now, not every stock that sinks like the Titanic is that golden investment.  Some companies make a huge business shift like when Hewlett Packard decided to get away from making computers.  But in Bank of America’s case, nothing fundamentally had changed.  It was drug down by the sector.  (After which BOA decided to buy a bunch of bad mortgages which is a different issue, but I digress…)

Sirius XM

Do you remember the first time you heard of satellite radio?  Did you laugh like I did?  “HA!  Who would be dumb enough to pay monthly for what you get for free?!”  That was before I understood why someone would want it, and soon I saw the huge potential it had.  Truckers started using it.  People who hated commercials started using it.  Heck, even my dentist started using it in his office.  It seemed like everyday people were using it more and more.

Well we all know the story of how eventually Sirius and XM (NASDAQ: SIRI) turned over a new leaf and merged into one company.  Some of you may also be aware of how low its stock price dropped: $0.10 a share.  It was around then I thought of getting in.  Surely this company is worth more than that I thought.  But as I read the critiques it was true.  Sirius was still unprofitable, and they had to figure out how to finally get in the black.  Despite what I was seeing around me with its growing user base and reading from the company on how it would lower costs, I ultimately listened to the experts and steered clear.  As of writing this article I’d be up over 1,400%.  Ouch.

The lesson is this:  Growth stocks often start out unprofitable.  The question that needs to be asked is: what direction is the company going?  Is the company like Pandora where you can’t seem to find any sort of comprehendible plan on how they intend to make money?  Or is the company like LinkedIn and headed in the right direction?  Sirius was, and is, going down the right path, and those who recognized this back then were handsomely rewarded.

Apple

Oh man, here we go again.  Same song, different verse.  In late 2008 Apple’s (NASDAQ: AAPL) share price had come down some to just under $100/share.  They still hadn’t completely left their iconic turn-wheel behind, and the iPad was just a gleam in Steve Jobs eye.  Even then Apple was extremely profitable and on its way up.  I thought about getting in when it dipped below $100.  Why didn’t I buy this time?  To me, $100 per share SEEMED like a lot of money.  Why would I buy Apple for $100, when I could get shares of other companies for way less?  I don’t need to tell anyone what Apple is worth today.

This lesson should be an easy one, but it plagues rookie investors.  A stock price means relatively little in relation to the value you are getting.  A company may be selling for $10/share and be ridiculously overpriced like Zynga (NASDAQ: ZNGA) was at its IPO, or a company may be selling for a reasonable if not good price at $50/share like Marathon Petroleum (NYSE: MPC).  What’s more important than the price, is how much money each share earns.  We call this EPS (earnings per share).  This metric helps in determining whether or not a price is justified.  Apple’s shares were justly priced then.  Apple’s shares are justly priced now even though they are trading for 6 times as much.  Why?  Because Apple’s earnings have gone up significantly during that time.

Conclusion

Unfortunately, the school of hard knocks has the best professors.  When you attend class at this school, you remember each lesson word for word.  No, it’s not a very fun school, but when you graduate you are more than just smart.  You are street smart.

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