Cody Kiss & Tell: Why a contrarian?, Tech risks, Apple’s earnings and much more
Here’s the transcript to this week’s Live Q&A chat. Join me next Wednesday at noon at http://tradingwithcody.com/chat or send me an email with your question at support@tradingwithcody.com.
Yo! I’m here, sorry for the delayed start. Had a visitor in my office and it ran late.
All right, let’s rock n roll.
I’m here and you guys ask me anything. Try to focus on strategy/concepts, but I’m happy to answer questions about specific stocks too.
Q. I would like to ask why you became a contrarian?
A. Great question. A few thoughts to answer it off the top of my head — 1. If you ever want to be something more than average, you have to do things that nobody else will do. 2. When I see everybody panic, it’s almost always when prices are already down. 3. When people on TV used to explain to me in 2007 that the economy and real estate and everything was great, we were at the top. 4. Whenever my inbox and the comments on my blogs turn into utter hate and anger and disgust, my own portfolio usually bounces. 5. The markets like to fool the most amount of people it can the most amount of time it can, and you’ve got to not be “most people” if you’re going to not be part of the fools. Want more reasons? I got ’em…
Q. I also have a question concerning strategy/concept. A lot of times when you read an article you take the contrarian view of what you read. How do you know when to take the contrarian view of an article or to go along with what the author is saying? Are their a specific group of author/analysts you trust?
A. Another great question. I don’t think I ever just take anybody’s article and believe in their thesis just because of who they are and what they’ve written before. Rather, I try to be free-thinking and critical in everything I ever read. For example, I love Yves Smith and how she sees through so much of the fraud and crime on Wall Street. But I almost always cringe at her endless predictions and rationalizations of how the economy are going to collapse tomorrow or the next day or something. Jim Cramer is another big influence on me and he personally helped me get started building my hedge fund and reviewing my strategies…but one of the greatest contrarian trades I ever made was putting 5% of my hedge fund into long-dated MSFT calls back in early 2007 when Cramer was selling his own MSFT position at what turned out to be an exact bottom in the stock and I was actively writing on TheStreet.com about how I thought Cramer was himself selling at the exact wrong time. To try to answer your original question in short, I’d say I try to be objective as I can whenever I read anything and that if my own take on the article is “contrarian” to it, I go with it.
Q. Cody, it seems like LNN (Lindsay) was a real departure from most of your highly Technology-centric portfolio. Do you see risks in being so Tech heavy and do you see yourself exploring other sectors/companies away from Tech in the vein of a LNN?
A. Another great strategy question. And yes, I do acknowledge the increased risks that come with being heavily invested in any one area. That said, my analysis continues to point to finding platform-technology-revolution stocks as the Republican/Democrat Regime does everything it can to force everybody and their mother out of cash and into anything not-cash and while the smartphone secular growth phase is on (more than a billion mobile phones are sold every year and smartphones will eventually make up 90% of that within the next five-seven years), so I stick with my playbook, even with the increased risks of investing heavily in platform technology companies like Apple, Google, Facebook, Amazon, Baidu. I am probably going to sell a couple of our smaller tech positions in coming weeks and am always on the lookout for non-tech plays like the Lindsay.
Q. Cody, Would like your thoughts on another historical inflection point that is approaching, the end of the 30 year secular decline in interest rates. Funds are presently significantly underweighted equities. Once it is clear rates have bottomed, there should be a huge flow of funds out of bonds. This should boost equity prices and p/e ratios. This is a potential stock market catalyst that seems to be under reported in the financial press.
A. The flip side of your thesis of a flight from Treasuries/bonds is that the US government will suddenly face HUGE interest payments on what will likely be over $20 trillion deficit by the time the rates would rise (already $15 trillion and counting), and did you see how badly the markets freaked out over Greece and Spain suddenly having to pay a still historically small, but much higher than recent interest rates? If rates on the US Treasury simply go back to where they were a decade ago, the markets could likely take that as a sell-everything-including-stocks catalyst. I’ll probably get bearish if and when the bond exit gets overly crowded.
Q. Cody, hope you can take a look at this clip and address the larger picture this analyst (?) is seeing and so my question about the downward spiral and it’s impact on revolutionary investing…thx. http://finance.yahoo.com/blogs/daily-ticker/retail-sales-drop-0-5-june-u-consumer-165255503.html.
As well as addressing your analysis to short the dollar stores.
A. Back in 2003, when Apple was at $25 a share, I got an email from one of the guys at Fast Money which condescendingly tried to explain to me how Apple was doomed and the stock was a great short because….wait for it….retail sales were putrid and the consumer was “spent”. If consumer spending/retail truly drops off a cliff and we see 5-10% drops year/year in the monthly numbers, I’d probably start to really freak out too. But so much of the macro economic worries are just that — worries. They rarely tell you anything that will help you analyze your own stocks and/or the ongoing revolutionary investing that we do.
Q. If you are a contrarian, why not take a contrarian view on banks? If all the people are selling them and bad news as LIBOR may be a “buy the bad news” because it may already be discounted in current prices.
A. None of the long-only money managers that I know are selling their bank shares. They seem remarkably complacent and/or bullish about banks here. Few shorts that I know are willing to start building their bank shorts right now, as they’ve been endlessly squeezed out of them over and over since 2008. I think I am being contrarian from the investing public in betting against the banks, though I agree I am no being contrarian from the general public in hating the way banks operate today.
Q. “The rot at the banks has finally caught up to them, and I think this is a major historical inflection point.” Cody, if you are right, what are the implications for the overall stock market? The financials led the market crash in ’08.
A. If the banks finally admit to their complete insolvency, then I’d expect we’d see the markets drop 10% or so immediately and then rebound to new all-time highs within six months of that crash. Washing out the rot and the fraud and extraction and the rent-seeking and the profiteering and the outright theft on Wall Street instead of institutionalizing it, would be short-term panic, but would save our economy and our country almost immediately thereafter.
Q. Cody, agree with your calls on JPM and MS for shorting. How about any of the Euro banks, DB and UBS in particular?
A. I struggled with narrowing it down to just two stocks. Yes, most of the European banks look like fraudulent house of cards to me too.
Q. Do you ever try weekly calls/puts or are those just too risky to time? Thanks
A. I do occasionally use weekly calls and puts. In fact, if you’ll check the archives, you’ll find a few times when we’ve successfully nailed a very short-term option trade, though not necessarily with “weekly” options (along with some misses too). In order for me to risk my capital on a short-term call or put, I need a catalyst before the expiration — usually an earnings report or something of that sort will prompt my short-term option trade. Stay tuned, I’m sure I’ll have some trades that use weekly calls and puts. To explain what “weekly” options are vs. the more traditional options: In 1973, the Chicago Board Options Exchange (CBOE) introduced the standard call options that we know today. In 1977, the put option was introduced. They have proven to be extremely popular as trading volume has grown at a compound annual growth rate over 25% between 1973 and 2009. Clearly, investors understand options, are becoming more comfortable with them and are using them in a variety of strategies. TUTORIAL: Options Basics Weeklys: A New Class of Option In 2005, 32 years after introducing the call option, the CBOE began a pilot program with “weeklys” options. They behave like monthly options in every respect like, except that they only exist for eight days. They are introduced each Thursday and they expire eight days later on Friday (with adjustments for holidays). Investors who have historically enjoyed 12 monthly expirations – the third Friday of each month – now can enjoy 52 expirations per year.
Q. With all the pessimism surrounding apples next earnings report, do you think it will be a good quarter? How do you think the street will react?
A. I’d much rather have pessimism than optimism heading into Apple’s report, because it’s easier to do better than the Street expects if the Street is pessimistic heading into the report. I have no insight into Apple’s quarterly report numbers, but regardless of how it trades after the report, I expect to see Apple at $1000 by 2015. Feet to fire, I expect Apple to “beat the Street” and I expect a 3-5% pop after the report. But I’m not making any trades on that feet-to-fire analysis.
Q. You seem to know more about Apple than most. When is you estimate on when the new iphone will be released?
A. I’m looking at September or October time frame for the next iPhone. I don’t think they’ll call it iPhone 5 though. Just “the new iPhone”.
Q. Cody, couple of questions for you. 1. Several of the (Apple / supply chain) stocks are up big today yet Apple is really consolidating. What are your thoughts on the supply chain stocks move in relation to Apple coming earnings report. 2. How exactly does Facebook make money from Apple? Simply with an app on the device thus apple users use facebook or is there a monetary licensing arrangement between the two companies.
A. I read absolutely nothing into a single’s action in Apple and/or its suppliers. Tens of thousands of traders and investors are selling tens of millions of shares of each of those stocks for a million of their own reasons and rarely does any single day’s action actually portend anything else. A2. I’ll forward your question onto my various FB sources and see if we can get an answer as to whether it’s a monetary agreement between Apple and Facebook on this app, but more to the point, when Apple puts FB as a standard app on hundreds of millions of iPhones, it further seals Facebook’s platform as a de facto standard for all those people and over time, FB will indeed learn to monetize it’s mobile base. Just 6 cents per day per daily user at Facebook (not just mobile but across its entire site) would put us up at more than $10 billion in earnings for the company. That’s not today’s business, but I do expect Facebook to generate increasing amounts of revenue per user over the next three years and six cents per day per user doesn’t seem impossible to me. Far from it.
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I’m writing up an article about that 6 cents per day analysis for you guys btw.
Q. Hi Cody. Would appreciate your thoughts on how badly do you think BRCM will be affected by Samsung’s acquisition of Cambridge Silicon Radio? Thank you!
A. I don’t think the Samsung acquisition of Cambridge will hurt BRCM much at all. BRCM’s chipsets are still required in the Samsung handsets and will be for the foreseeable future, despite the Cambridge acquisition. Samsung at some point is going to have to decide whether it’s a chip company or a handset/retail vendor — but for the next couple years, I expect things for both Samsung and BRCM to play out well.
Q. Hi Cody, what’s your view on QCOM right now? Is it a good time to start accumulating some commons and calls at this price or should we wait after its earnings today?
A. I like QCOM, but am worried about the near-term for it. I’d probably wait til after earnings to start building my position with gusto, but as always, I’d suggest buying a little now to get a toehold and leaving yourself room (plenty of room in this case) to buy more over time.
Q. Hi Cody. Any thoughts on how the PCXCQ trade has progressed so far or prognostication on where it will go or when? It’s my first one of these trades and am fascinated, but know that I’m truly flying blind while following your lead. Thanks.
A. The coal industry has taken a big hit politically and the markets have trashed coal since we bought this coal-company bankruptcy stock. No new insights for you based on the trading so far, and it reminds me of how I felt about our Kodak bankruptcy trade just a week or two into it when it had barely bounced and just didn’t ever seem to want to go up. It did pop soon thereafter and popped big. No way to know if PCXCQ will indeed play out the same yet or not, and I’ll be clear in saying that I didn’t risk a bunch of capital in this trade but it still makes me nervous every time I think about it.
Q. Sorry to through another direct question about a specific stock Cody. IP stock has been increasing steady and seemed to jump this month and was wondering if you had any insight on why? Do you see a future in ip? Do you seem them heading in the right direction? Thanks again cody!
A. Don’t apologize for asking a question about a specific stock. Am happy to answer it. I just think the readers seem to get more out of the strategy/concept questions, but let’s talk IP. It’s a paper company trading at 12x earnings and is supposed to grow those earnings nearly 20% next year. But that’s only a 3% topline growth estimate for next year and when you include the $5bb in net debt that they have on the balance sheet, it’s trading at closer to 16x next year’s earnings on an enterprise value to earnings ratio. I don’t like IP as an investment for these reasons, but for the short-term it does have momentum and I’ve no idea how to play that.
Q. Cody any view on CTXS and TDC?
A. Please pick one.
Q. TDC.
A. I was working on both TDC and NICE just the last week and I think both are positioned very well for the next five to ten years to grow nicely, but the stocks sure ain’t cheap.
Q. What are your thoughts on MU? How do you feel on Mu recent purchase of Japanese chipmaker Elpida for 2.5 billion? Where do you see this company heading?
A. That MU just can’t seem to make any sustainable money. Earnings and cash flow are just not growing and haven’t in years and with the tablet revolution displacing the bigger margin PC line of MU’s business, I’m staying away from MU. Consolidating the industry like they have by buying Elpida will over time help the company (illegally, I might add) raise prices through their market-size domination, but MU would have to show me a couple quarters of finally getting that right before I’d risk my capital on them.
Q. Any move here before FFIV E.R. (if I don’t buy yet )?
A. I’d probably nibble 1/3 or so as much as you want to eventually own of FFIV before the report and that way you can build up the position to a full size based on how the stock trades after that…buy weakness if it’s to be a true long-term holding for you.
Q. Hi Cody, what do you think of USO as a short? Are most of your calls based on fundamental analysis or technical analysis? I’m a new member to this service and was curious.
A. I like USO as a short here, in large part because I think the giant investment banks, including MS, are rigging it similarly to how they have been rigging LIBOR. I think the price of oil is artificially jacked up right now and I expect to see it trade closer to $50 in the next couple years. Timing is the question, but I think it’s closer to topping than say, putting on a double, and I am actively looking at that trade for my own portfolio.
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In a general sense, my mission is always to find the best companies in the fastest growing sectors and invest in their stocks when they are cheap and to find the worst companies in declining sectors and short them when they are way overvalued. For my long-term investment theses, I rely on bottom-up fundamental and top-down marketplace analysis. For short term navigation, I mostly rely on sentiment, psychology and news analysis. I’ve never drawn a line on a stock chart in my life.
Q. Hi Cody, I wanted your opinion on some potential short ideas. With all the long techs in the portfolio, do you think it would make sense to hedge with some tech shorts? Some ideas would be: DELL, TLAB or NOK. Also, on the for-profit education side I saw that CECO has been having an even harder time than Apollo Group. Their fundamentals are deteriorating even faster (revenue, net margin, federal loan dependency). Would this be a potential short idea as well?
A. Yes I would like to have a few more shorts in tech to help hedge the longs, to continue the theme from the above answer. I wrote for my subscribers about how RIMM was doomed repeatedly and was the first to tell people how Dell was “ruined”. Here’s me sitting down with Bianna Golodryga long before she was the co-anchor of Good Morning America talking back in 2006: http://www.cnbc.com/id/16080777/Cody_Willard_General_Manager_CL_Willard_Capital_Partners I think it’s too late to short them now. Looking for the next RIMM and DELL to get short in tech though, stay tuned for more.
Okay guys, I’ll answer the rest of these questions and we’ll send out the transcript later today.
Great chat once again! Thanks!
You guys here in the weekly chat want a sneak preview of something I’m about to send out to everybody?
Sure!
Take a look at this new feature…we’ve gotten a bunch of definitions started and I’m going through each one and refining it and putting it into Cody-speak. Let me know what you think and if there are other terms that you want us to explain/define. http://glossary.tradingwithcody.com
