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Posts Tagged ‘investing’

Why is a value investor writing about an unprofitable internet company? Because value investing is about finding dollars that trade for fifty cents; with a market cap of less than 75% of sales, Overstock.com (OSTK) looks like it may be exactly that.

But isn’t it too risky?

The greatest risk in any investment is the risk of overpaying. So, the real question is: what is Overstock worth? I think it’s worth at least $1.5 billion. With Overstock’s market cap currently sitting around $500 million, my valuation certainly looks far fetched. But, there’s only one way to know for sure. Let’s take apart my argument piece by piece, and see if any of my assumptions are unreasonable.

First Assumption: Over the next five years, Overstock will neither generate truly free cash flow nor consume cash. In other words, its free cash flow margin will average 0%. Cash generation in some years will exactly offset cash consumption in other years. Obviously, this assumption is unreasonable, because there is almost no chance the cash flows will exactly offset.

That’s not a problem if it turns out Overstock does generate some free cash flow over the next five years. In that case, my assumption simply errs on the side of caution. If, however, it turns out Overstock actually consumes cash over the next five years, there is a problem – possibly a very big problem. So, which scenario is more likely?

Overstock’s revenues are growing quickly. Gross margins look solid at 13.3% in 2004 and 14.9% over the last twelve months. Overstock’s unprofitability is the result of its selling, general, and administrative expenses (SG&A) which have been growing exponentially. Will these expenses continue to grow? Yes, but not as fast as revenues. Over the last twelve months, Overstock’s spending on cap ex has been 5.6% of sales. That number is an aberration. In the long run, spending on cap ex should not exceed 3% of sales. Considering the business Overstock is in and the expected sales growth, the company will, more likely than not, generate some free cash flow over the next five years. Therefore, the assumption that Overstock will be cash flow neutral over the next five years is not overly optimistic.

Second Assumption: Over the next five years, Overstock’s sales will grow by 15% annually. Is this an unreasonable assumption? Again, I don’t think it is. Very few industries are expected to grow as fast as eCommerce. Overstock’s revenue growth in 2003 and 2004 was over 100%. In the past year, that growth has slowed. However, it is still closer to 50% than it is to 15%. Overstock isn’t in a cyclical business. So, there is no reason to believe current sales are abnormally high.

Also, all that spending on advertising is increasing consumers’ awareness of Overstock. A review of Overstock’s traffic data shows it has not only been gaining more visitors; it has also been climbing the ranks of the most popular web sites. While it is a long, long way from the Amazons, Yahoos, and eBays of the world (and will never reach those heights) Overstock is becoming a well known internet destination. This fact was most clearly evident in the weeks leading up to Christmas. Shoppers who visited Overstock during the holiday season obviously know it exists, and may very well return at some other point in the year. Analysts are predicting very high growth rates for Overstock; however, they are also recommending you sell the stock. I don’t put any weight in their estimates. But, for the other reasons given, I believe the assumption that Overstock will grow sales at 15% a year for the next five years is not unreasonable.

Third Assumption: Six to ten years from today, Overstock will have a free cash flow margin of 3%. Ten years from today, Overstock’s free cash flow margin will rise to 4% and remain at that level. Now, of all the assumptions I’ve made, this one is the most questionable. Sure, Amazon has that kind of free cash flow margin, but Overstock isn’t Amazon, and it never will be Amazon. Overstock’s gross margins are less than Amazon’s. In fact, Overstock’s gross margins are less than Wal – Mart’s. However, Overstock’s fixed costs will eat up a much smaller portion of its sales than is the case over at Wal – Mart.

If you compare Overstock to other online retailers, you will see that if Overstock does experience strong sales growth, a 3% free cash flow margin six years from now is not unreasonable. I assumed Overstock’s sustainable free cash flow margin will be 4%. There’s a case to be made that 4% is too high. I won’t make that case, because I don’t believe in it. Remember, that 4% number comes ten years out. That gives Overstock plenty of time to grow sales and thus reduce SG&A as a percentage of sales.

Fourth Assumption: Six to ten years from today, Overstock will be growing sales by 12% a year; eleven to fifteen years from today, Overstock will be growing sales by 8% a year; thereafter, Overstock will grow sales by 4% a year. Let’s see what this really means. According to these assumptions, Overstock’s sales will be as follows:

Today: $707 million

2011: $1.59 billion

2016: $2.71 billion

2021: $3.83 billion

2026: $4.66 billion

2031: $5.67 billion

2036: $6.90 billion
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Forex trading systems are all about getting investments into the foreign markets. Foreign exchange markets are abbreviated to be called Forex. The worldwide trading of stocks in companies and in products happen over the Forex trading system. There are over a trillion dollars traded on the Forex market everyday. You can learn to chart and follow markets in the Forex trade world on your own, or you can rely on a broker as you would in the New York stock exchange. The Forex trading systems are similar in method, but each is a proven method of how to make money, how to learn about companies and how to follow what is going on with the money you are investing in the Forex trading markets.

You can live anywhere in the world and trade stocks and investments in the companies that are involved in the Forex markets. There are no limitations to the money you can make, or the money you can lose. The Forex markets can be tapped into online, over the phone or by contacting a broker in person. If you are interested in making money, you can do it on the Forex market, without having to have employees, or a broker to do this. You can get involved in learning about the investments in the Forex markets, and take on the responsibility for your own money, and making your own money. Many are starting their own businesses using their education and experience on the Forex market to make money.

The Forex market is one that is world wide, so there is sure to be something of interest to just about anyone that wants to expand their investments and expand their learning about money in the world wide markets. There are many experts in the Forex markets, and using the Forex trading system that you feel most comfortable with, you can be a Forex market expert as well. Read the rest of this entry »

If you have heard fund managers talk about the way they invest, you know a great many employ a top down approach. First, they decide how much of their portfolio to allocate to stocks and how much to allocate to bonds. At this point, they may also decide upon the relative mix of foreign and domestic securities. Next, they decide upon the industries to invest in. It is not until all these decisions have been made that they actually get down to analyzing any particular securities. If you think logically about this approach for but a moment, you will recognize how truly foolish it is.

A stock’s earnings yield is the inverse of its P/E ratio. So, a stock with a P/E ratio of 25 has an earnings yield of 4%, while a stock with a P/E ratio of 8 has an earnings yield of 12.5%. In this way, a low P/E stock is comparable to a high – yield bond.

Now, if these low P/E stocks had very unstable earnings or carried a great deal of debt, the spread between the long bond yield and the earnings yield of these stocks might be justified. However, many low P/E stocks actually have more stable earnings than their high multiple kin. Some do employ a great deal of debt. Still, within recent memory, one could find a stock with an earnings yield of 8 – 12%, a dividend yield of 3- 5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could only come about if investors shopped for their bonds without also considering stocks. This makes about as much sense as shopping for a van without also considering a car or truck.
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Real estate investing is always good and sometimes it’s red hot. When it’s hot dozens of real estate seminars begin rolling across the country and thousands of people spend thousands of dollars for investing education.

It’s startling to learn that of all those thousands of eager folks who attend these seminars only about 5% buy even one investment house. Why? The real estate gurus sell the “sizzle” and make profiting from real estate sound easy. The truth is that it’s simple, but not easy.

Here’s a quick plan that will enable anyone to begin building financial independence.

There are basically four steps to investing in single family homes:

1. Buy homes below full market value. Yes, people really do sell homes for less than the home’s full value. The key is to understand that most home owners will only consider a purchase offer that is all cash and within 5% to 10% of their asking price.

The successful investor learns to find financially distressed home owners who have no choice but to sell for less than market value. They have lost their job or been suddenly transferred; they are divorcing; they been living beyond their income; the family has been overwhelmed with medical bills and, not uncommonly these days, their money has gone to support a drug habit.

Those are examples of motivated sellers. They have to sell and they will accept something other than a conventional, all cash offer.

2. How do you find motivated sellers? You work at it! Like any business it is important to develop a little marketing plan. One that is simple, yet very effective, is the one that was proven 75 years ago by the Fuller Brush company; door to door sales.

You are selling your skill as a home buyer to people who must sell. Your are there when they need you and you have the skill to help them solve at least part of their problem. With door to door prospecting you will learn more and buy more homes quicker than any other method. However, most people just won’t walk door to door for three or four hours per week. OK, there are other ways.
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