Sunday, June 22, 2014

Equity investing on a wing and a prayer

Why not some possibly interesting ideas on investing bets today?  What better day?

Briefly, here are three.

The first is Vodafone(Vod).  Because of some creative and unusual financial engineering, to retail investors this stock may look like a dog.  It sold its major stake in Verizon Wireless back to Verizon and then gave a whopping tax advantaged dividend to shareholders from some of the gains on that sale.  That dividend of course took a chunk out of Vodafone's stock price so on paper it looks as if the stock has been a meaningful money loser.  All things considered, it has definitely not been.  Its stock price has been leaking recently as its European market remains less than robust, but it is the leading wireless provider in India which seems set for a rebound in economic opportunity.  Vodafone also has franchises in Africa and 21 countries in total, a few that may seem not so important now, but that can change.  Among VOD's top ten shareholders there are no index funds, just well known investors.  Paulson and Co. is the largest shareholder, followed by Fidelity, Hotchkiss and Wiley, Invesco, T. Rowe Price, and other well known firms.  Money here is in already, more likely on the way.

The second much more dicey pick is Twitter(TWTR).  You may remember from a previous post that their business model has been questioned here.  Still, with the price dropping so far from its high and even its IPO price, some was bought here eight days ago and more on Thursday.  Short term performance really means nothing, but so far so good.  Twitter has a powerful balance sheet as befits a new IPO and has meaningful revenue growth, why I don't really know.  It is losing money due to high expenses, presumably marketing expenses and expenses to attract more first class talent.  Its precipitous drop is partially due to a poor decision to bring in huge private investors late in the game before the IPO, and one of those investors has been completely liquidating his position.  A few others have as well.  With that going on there is not a good way to value this stock.  What is visible however is how ubiquitous Twitter and its symbol have so quickly become widely recognized, and used by television programs, radio programs, and other media outlets to get quick feedback from audiences.  This may not be a flash in the pan, and if not the stock price may ultimately justify its value.  Still timid here, but in the game.

The third suggestion is the wildest by far, by far.  That's American Apparel(AAP), who just fired its founder and CEO Dov Charney, and Charney has apparently vowed to fight his dismissal.  His many issues with sexual harassment and odd behavior may play a part in this, but the real legal strength of his dismissal may be proof that he was using company funds for personal and family expenses.  That's just plainly illegal, while all of the sexual harassment claims are tedious to prove, take lots of time, and can be quietly bought off.  AAP has a horrendous balance sheet with modestly negative shareholder equity, but fortunately I guess, depending on terms of the agreements, much of their balance sheet is long term debt.  Over the last four years revenues have grown moderately but consistently, but the most recent quarters have been sketchy.  One could guess that same store sales growth numbers now stink.  Each year has experienced modestly negative net income due to high expenses.  AAP has 256 stores that are interspersed among 20 countries, an obvious expansion beyond reasonable means it seems and perhaps a perfect example of the pathological hubris that has characterized the talented  Charney in many areas.  The store has a well known brand and a following among some segment of young style conscious customers, not well known here, so it has a chance.  Here I went into the stock Thursday with a very modest investment and made a few cents, but am willing to vacate with a loss rapidly if everything falls apart further.  Call me reckless on this and you will be right, but there have been times when this type of investing has been lucrative.

I wouldn't recommend that others follow my lead on TWTR  without doing homework and knowing the substantial risks involved.  I wouldn't recommend that anyone follow my AAP investment unless you want to throw caution to the wind.  VOD may look good if their financial engineering becomes more widely understood and if its markets begin to show some improvement.  There should be no big risk of loss in that company, at least from this perspective.

Signing off on what I hope is a lucky day.  


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