EQUITIES

Equities, Dividends, Spin-offs and IPOs

Equity is typically referred to as shareholder equity (also known as shareholders' equity) which represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off. Equity is found on a company's balance sheet and is one of the most common financial metrics employed by analysts to assess the financial health of a company and with which an investor can calculate a corporation’s equity or net worth.

Shareholder equity can also represent the book value of a company.

Stock Market

stock marketequity market or share market is the aggregation of buyers and sellers (a loose network of economic transactions, not a physical facility or discrete entity) of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately. Examples of the latter include shares of private companies which are sold to investors through equity crowdfunding platforms. Stock exchanges list shares of common equity as well as other security types, e.g. corporate bonds and convertible bonds.

>3 Benefits of Dividend Stock Investing

Investing in dividend stocks can help you reach your long-term financial goals, and make you a better overall investor. Many people invest in dividend-paying stocks because they offer steady income, and the possibility of compounding returns.

Because many dividend-paying stocks are considered financially stable, the stock prices should steadily increase over time. If you stay patient and remain disciplined, dividend stock investing can provide stable income to fund your needs

What are Dividends?

When an investor buys a stock, they own a fraction of the company. Because of this relationship, the company’s profits are shared with the shareholder. And dividends are a popular way to give profits back to shareholders. Dividends are the portion of a company’s profits that they pay to investors.

Dividends are decided by the company’s board of directors. The size of the dividends depends upon the company’s performance. If the board of directors expects higher profits, they might declare higher dividends. Many companies increase their dividend every year… these companies are called the Dividend Aristocrats. They are a safe option for dividend investors.

>1. Compound Your Wealth

Albert Einstein is noted for saying that compound interest is one of “the most powerful force in the universe.” And Warren Buffet called compound interest one of the three biggest factors contributing to his wealth.

It can be thought of as “interest on interest,” and it will make a sum of money grow at a faster rate than simple interest. Dividend reinvestment plans, also known as DRIPS, take advantage of compound interest. DRIPS allow investors to reinvest their cash dividends into shares of dividend-paying companies.

In other words, investors can buy more shares with their dividend payments.

The S&P 500’s average return from 1928 through 2017 was about 7.6%. But, if all dividends had been reinvested, it would have been about 11.5%. That proves DRIPs increase your wealth over the long-term regardless of economic downturns. In most cases, DRIPs allow shareholders to get shares commission-free. And in some cases, the company will offer shares at a discount to the current share price.

Dividend reinvestment plans compound your returns, and allow you to seriously grow your wealth.

>2. Beat Inflation

Inflation slowly erodes the purchasing power of your money. Most fixed income investments don’t account for inflation. Dividend stocks, on the other hand, do account for inflation. They tend to raise their dividends as inflation grows over the long-term. In fact, some companies increase their dividend every year.

There are 131 companies, the Dividend Aristocrats that have raised their dividends every year for at least 25 years. There are another 205 stocks whose dividends have increased annually for at least 10 years (the Dividend Achievers) and 528 more companies who have raised their dividend every year for the last five years.

>3. Outperform the Market

Berkshire Hathaway outperformed the S&P 500 in 2018, and it is not the first time. The company’s chairman, Warren Buffett, has earned a reputation for outperforming the market because of his intelligent stock selections. You can do the same. Instead of investing in an index fund do your own research. Chosen wisely, individual dividend stock selections post greater returns than the market.

Also, companies like the Dividend Aristocrats tend to be more stable, and less susceptible to the pitfalls of market volatility. If you choose the right companies you can get positive returns during bear markets.

Head and Shoulders Technicals

Market Outlook: Is The Stock Market Making A Head And Shoulders?

>Summary

As the stock market approaches all-time highs, some traders and investors are wondering if the stock market is making a head and shoulders pattern.

The problem with these patterns is that they are only obvious with 20/20 hindsight. These patterns have too many false signs.

Here we examine the medium term bullish and short term bearish case for stocks.

The stock market’s relentless rally continues (4/15/2019). The S&P 500 (excluding dividends) is just 1% from a new all-time high, while the S&P 500 Total Return Index (including dividends) is already at an all-time high. While the chart may “look like” a bearish head-and-shoulders pattern, these patterns are only clear with the benefit of 20/20 hindsight. Too many potential head-and-shoulders patterns don’t work out in real-time (i.e. false bearish signals). And, by the time you wait for a “bearish confirmation” break of the neckline, the S&P is already down -20%.

The economy’s fundamentals determine the stock market’s medium-long term outlook. Technicalsdetermine the stock market’s short-medium term outlook. Here’s what we think is going on today.

  1. The stock market’s long term risk: reward is no longer bullish.
  2. The medium term direction (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
  3. The stock market’s short term leans bearish

We tend to focus on the long term and the medium term.

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Long Term

While the bull market could keep going on, the long term risk / reward no longer favors bulls. Towards the end of a bull market, risk / reward is more important than the stock market’s most probable direction over the next 12+ months

A few leading indicators are showing signs of deterioration. The usual chain of events looks like this:

  1. Housing – the earliest leading indicators – starts to deteriorate. This has occurred already
  2. The labor market starts to deteriorate. Meanwhile, the U.S. stock market is in a long term topping process. The labor markets have not deteriorated significantly yet.
  3. Other economic indicators start to deteriorate. The bull market is then definitely over, and a recession is projected to have started. But, a U.S. recession is not imminent right now.

Goldman Sachs says the Global Economy has bottomed already; “Recession Risk Over”

Goldman Sachs Chief Economist Jan Hatzius points to the global economy having missed a bullet, the threat global markets are “more sanguine on recession” and are bullish on risk assets and bond yields. They are also modestly so on oil but are bearish on dollar value. They also believe the US will lead the global pull back from the brink of recession, but that Europe could be the globe’s weak link. Though growth is slow, Goldman’s activity indicator for February showed an increase compared to the December and January data which prompted many to call “recession.”

According to Goldman, some green shoots are emerging that suggest that sequential growth will pick up from here. Economist Hatzius does say, “Global GDP growth forecast of 3.5% for 2019 is still at risk.” So, near-term recession risk is much lower than widely feared thanks to the Feds increased focus on financial conditions. One hike still expected is for 2019.

US GDP is around 3%, unemployment is at its lowest for five decades, inflation is at 1.6% and income levels are growing at their fastest for ten years. US consumer confidence levels also rebounded in February from concerning numbers in January. The Conference Board confidence index rose to 131.4 from January’s 121.7. This was way above analysts’ expectations of around 124 points.

The US stock markets and Dow Jones Index have also seen a resounding recovery from December losses. Though some analysts believe recent equities performance could be a bear market rally?

Dow Jones Industrial Average Over the Last Six Months

The biggest recession risks globally are from Europe and China.

China’s economy is already slowing and it’s the pace and accuracy of this slowdown that may influence global growth. In Europe, Brexit hovers over both the UK and Europe. The economies of Germany, France, and Spain are slowing. China is also the EU’s second largest export market after the US. As always, the performance of global economies is deeply intertwined.

 

Spin-offs

In Peter Lynch’s investing classic, One Up on Wall Street, he mentions spin-offs as an area where he looks for potential opportunities. We have covered many of the points that Lynch makes, but they are still worthwhile to underscore.

Lynch begins, “Spin-offs often result in astoundingly lucrative investments.”

He believes parent companies do not want to spin-off divisions that will go on to fail as this would reflect poorly on the parent. Lynch also notes, “And once these companies are granted their independence, the new management, free to run its own show, can cut costs and take creative measures that improve the near-term and long-term earnings.”

The greatest spin-offs of all were the ‘Baby Bell’ companies that were created in the breakup of AT&T: Ameritech, Bell Atlantic, Bell South, Nynex, Pacific Telesis, Southwestern Bell, and US West. While the parent has been an uninspiring performer, the average gain from stock in the seven newly created companies was 114% from November 1983 to October 1988. Add in dividends and the total return is more like 170%. This beats the market twice around, and it beats the majority of all known mutual funds.

Equity IPOs (Initial Public Offerings)

Companies that reach the final IPO stage have involved these processes in the following stages:

Angle Investors / Private Placements / PPMs / Private Equity Clients / Pre-IPOs / Qualified Investors

An Offering Memorandum or Private Placement Memorandum (PPM) is used when a company is offering the private sale of securities - stocks, bonds, notes, etc - that are unregistered with the SEC. The Memorandum informs potential investors about the offering and about the potential risks of purchasing the securities, and should be as detailed as possible on the current state of the business. It gives prospective investors the parameters of the offering, such as the number of shares being sold, the purchase price, and any caps or minimum number of shares an investor can buy.

Most importantly, an Offering Memorandum / PPM include in-depth information about the company, its current financial situation, any current and future projects, and potential uses for the new capital to be generated by the offering. It can also protect the company offering the securities from liability, acting as proof that the investor was fully informed (Qualified). Securities law can be complex.

Then comes the wait for the IPO; which may never come? But, when it does, many millionaires can be minted on the first day of trading.

Bet on the Right IPOs

The average IPO outperformed the market by a 30% margin last year. And analysts expect this trend to only continue accelerating. But those gains are nothing compared to what you could be making by cutting the fat. The Okinawa Screening Algorithms are used to identify high probability IPO offerings. The companies flagged by IPO screening systems have performed twice as well as the broader market

Securities Analysis

It is a good time to consider the fundamentals of any equity investment considered thru Securities Analysis even if you are a technical / momentum trader. Securities Analysis ( via Certified Financial Analysts CFA) is a value investment certification and tool.

Let’s Look at TESLA:

Is the Whole Company High?

If you are the “securities analyst” type you might consider Tesla a good exercise in evaluating Equities (in general); what can go wrong and how do you play it?

With Tesla Stores Closing; Prices Rising, Is the Whole Company High? It seems that way.

But, the new M3 model is now getting some traction, but will this head start on the coming competition be enough to really support these meaningless price-to-earnings numbers and stave off any looming debt payment concerns?

The Debt Problem

Tesla’s “Impossible” Task: Paying Off Debt in 2019.

These debts are listed under Note #10 on page 24 of the latest Form 10-Q. The ones that interest analysts were the 2.75% Convertible Senior Notes due in November 2018 and the 0.25% Convertible Senior Notes due in March 2019. The Unpaid Principal Balance is $230 million and $920 million, respectively.

Tesla recently had to pay out of cash $920 million on the Notes due March 2019. This took 1/3rd of TESLA’s cash-on-hand; the stock price was below the conversion price necessary to avoid a cash payment. Analysts say this could put TESLA in a cash bind later in 2019.

So far, 2019 has been a very schizophrenic year at the world's biggest electric vehicle maker.

Just weeks later, Tesla announced another round of price cuts. Closing retail locations and dismissing the bulk of its sales staff in order to transition over to online sales — presumably leading to even more price reductions.

Less than two weeks after that, the company pulled a 180 and announced that its retail locations would remain open and that its product prices wouldn't be reduced at all.

In fact, all four of the company's current models would be going up in price by an average of 3%.

Who's Driving This Bus?

It's not often that you see this sort of beheaded chicken-like behavior from a company valued at nearly $50 billion.

Be careful when you seek to trade only on technical’s (see Technical Trading)

And this back-and-forth, up-and-down, side-to-side mentality has had predictable effects for the investment community.

Nothing that Tesla (NASDAQ: TSLA) has done lately — not the price change announcements or even the release of the company's second SUV — has managed to give the share price a bump into the next level.

Or, in this case, back to previous highs.

Which begs the question: What is going on at Tesla?
Securities Analysis and TESLA

For the “securities analyst” types, they might consider Tesla a good exercise in evaluating Equities (in general); what can go wrong and how do you play it?

With Tesla Stores Closing and Prices Rising; is the Whole Company High? It seems that way. But the new M3 model is now getting some traction but, will this head start on the coming competition be enough to really support ANY P/E numbers and stave off any looming debt payment concerns.

Tesla Inc’s PE Ratio (as of today 4/15/2019) shows if a company loses money, the P/E ratio becomes meaningless.

As of today 4/15/2019, Tesla Inc's share price is $266.38. Tesla Inc's Earnings per Share (Diluted) for the trailing twelve months (TTM) ended in Dec. 2018 was $-5.88. Therefore, Tesla Inc's P/E ratio for today is meaningless.

Tesla Inc's Earnings per Share (Diluted) for the three months ended in Dec. 2018 was $0.78. Its Earnings per Share (Diluted) for the trailing twelve months (TTM) ended in Dec. 2018 was $-5.72.

As of today, Tesla Inc's share price is $266.38. Tesla Inc's EPS without NRI for the trailing twelve months (TTM) ended in Dec. 2018 was $-5.72. Therefore, Tesla Inc's PE Ratio without NRI ratio for today is meaningless.

Tesla Inc's EPS without NRI for the three months ended in Dec. 2018 was $0.78. Its EPS without NRI for the trailing twelve months (TTM) ended in Dec. 2018 was $-5.72.

During the past 3 years, the average EPS without NRI Growth Rate was 6.20% per year. During the past 5 years, the average EPS without NRI Growth Rate was -56.00% per year.

During the past 12 years, Tesla Inc's highest 3-Year average EPS without NRI Growth Rate was 41.10% per year. The lowest was 0.00% per year. And the median was -71.10% per year.

Tesla Inc's EPS (Basic) for the three months ended in Dec. 2018 was $0.81. Its EPS (Basic) for the trailing twelve months (TTM) ended in Dec. 2018 was $-5.72.

It's not often that you see this sort of beheaded chicken-like behavior from a company valued at nearly $50 billion.

Be careful when you seek to trade only on technical’s (see Technical Trading)

Nothing that Tesla (NASDAQ:TSLA) has done lately — not the price change announcements or even the release of the company's second SUV — has managed to give the share price a bump into the next level.

Or, in this case, back to previous highs ($354). Which begs the question: What is going on at Tesla? The problem isn't the idea of the electric vehicle itself.

As an industrial trend, the EV has plenty of validity and will likely, almost definitely, become the standard of the future. The same goes for the company's line of distributed energy storage solutions, the Powerwall. The fundamental ideas behind both are sound, revolutionary, and will become commonplace in the coming decades.

The issue with both the cars and the Powerwalls is that they are, for lack of a better term, already obsolete.

The Oldest Engineering Mistakes in Human History

These little-known but nonetheless deadly flaws, affecting the electric motors and the batteries that power them, have the potential to destroy the company from within, rendering its gigafactories useless even before coming online.

But what are these flaws, and if they're so profound, why haven't they been addressed yet? Well, these design defects, we are relieved to say, aren't the fault of Tesla engineers. The problems have been universal, both for electric motors and for rechargeable batteries, since the very advent of the technologies.

The Electric Motors

The problem goes back nearly 200 years, to the very first prototypes created by Michael Faraday. The issues are a technical nightmare to solve but are fairly easy to understand.

Efficiency and Reliability is the issue

Electrical motors only function at peak efficiency at one preset speed. Run them above or below this optimal speed, and efficiency drops like a rock. And because electrical generators are essentially electrical motors working in reverse, the exact same issue plagues power production across the globe.

The Batteries

Up until now, there simply has been no way to accurately predict and respond to natural wear and tear on a molecular level.

In the case of the batteries, the issue is Cell Fatigue Rates.

The result is that modern rechargeable battery arrays, like the kind powering every electric vehicle in existence, age and fail at highly varying rates, regardless of usage patterns. This makes resale of used electric vehicles a potential hornet's nest. It also makes catastrophic malfunctions, like the kind that wind up turning shiny Teslas into bonfires, more and more common with each passing year.

Up until quite recently, these flaws haven't exactly been flaws. They've been natural characteristics of the technology. We've accepted and dealt with them as inevitable drawbacks to otherwise beneficial innovations.

But, when will these problems come home to roost for TELSA?

We would sell TESLA short on any failures at the high-end of the recent trading range and protect with deep out of money call-options.

This could come on some bullish announcement on the new M3 model. If no strong breakout to new highs then establish shorts. Or wait for a new downtrend to develop as the ride down will long and precipitous. When the M3 competition hits the market in earnest, this stock could go to zero.

In the past, when revolutionary new technologies have threatened the status quo, Tesla has taken the pragmatic route and simply purchased them.

It happened just weeks ago, when Tesla bought out California-based battery maker Maxwell at a 56% premium to market price.

Will the same fate befall a company whose electric motors and battery technology make the heart of every Tesla product obsolete?

Fortune favors the bold