Thank you for the great post Tazio.
Sorry for taking so long to respond. I wasn’t ignoring you; I simply got extremely busy the past few days and haven’t checked in with SI.
First, let me say that I truly appreciate the good spirited nature of your message. The reason I’m a SI member is so I can engage intelligent people in discussions about the market so please feel free to give your opinion anytime.
"Think in terms of asset allocations and how BEST to extract a return on the same assets."
I’m in total agreement with you about the importance of asset allocation. But what exactly is the BEST way to allocate capital? There are as many answers as there are investors. I’ve adopted the position that the best way for me is the one that achieves my financial goals. And for me that is 15% or more annual return over the next 10-15 years.
Now some may achieve that goal tracking momentum stocks such as the ones you’ve identified, and others will achieve that goal bottom fishing. I’ll be somewhere in-between. Some will make 16%, 20%, or 25%. That’s great, and I’ll do my best to shoot for 25% annual returns. Am I going to be disappointed if I “only” get 15%? Heck no! That’s because 15% will get me where I want to be. The important thing is that I reach the goal, not how much I over shoot it.
The other point I need to make is one about risk. I don’t want to dart in and out of momentum stocks trying to catch the next wave. I’ve never been very good at that. There is a place for short-term plays, but it’s not in my circle of competence. What I do understand is numbers, and the numbers on Oracle make sense to me.
"Negatives: The main one, IMO is that for now, the market hates it AND the tech industry/sector is in a depression as far as stock prices go."
I love the fact that the market hates Oracle and technology in general. All that means is that I'll get a piece of the company at better and better prices below it's intrinsic value The cold hard facts are that technology is not going away. I’ll go one step further. Technology will continue to grow! It has too. That’s because our society is based on technology. Indeed, our very survival depends on technology! It’s not a matter of whether or not technology will grow. It’s a matter of by how much, and as you said in your post, “how long will it take?” More importantly, (to me), will Oracle participate in that growth? That’s where we as investors must do our homework.
Database technology is CRUCIAL to the success of most businesses today. A company of any size at all would simply find it difficult to survive without it. Who is the dominant player in non-mainframe databases? Oracle. I don’t believe it’s a matter of survival for Oracle. It’s a matter of at what rate of growth will Oracle achieve. The major derailment for Oracle is some technological revolution that will obsolete its product. No such technology is on the 10-year horizon. If one does show up, I bet Larry will buy into it with some of the huge cash reserves that Oracle is holding.
Mr. Market can discount Oracle to the ground if it desires. So long as Oracle continues to make money year after year and their retained earnings continue to expand at 10% or more per year, the market will eventually wake up from it’s manic depressive state, realize technology is not going away, and bid up the price to the companies intrinsic value. I define intrinsic value as the cumulative projected earnings for a set period, (in my case 10 years) multiplied by the low, median, and high P/E from the previous 10 years. Then I further discount it another 20% as a margin of safety.
For Oracle, I’ve calculated it’s intrinsic value at $10 per share. Using short-term and long-term options, I can get in at $8 per share. Should Oracle fall lower than that, writing short-term and long-term calls at $7.50-$10 on a portion of my position will further reduce the cost basis of my core holdings until the market finally realizes the value of the company and prices the stock at it’s true worth. (I think I’ll sidestep the “efficient market” argument for now.) I'll be called out on my hedge shares and my core holdings will participate in the stock appreciation.
Should Oracle’s profits falter and retained earnings fall below my threshold, I bail with minimal losses and try again with another company.
I like all the companies you mentioned in your post. They are all in basic industries that have proven resilient over time. Most of them are already on my watch list, although I haven’t analyzed them to the same extent as Oracle. There’s just so many hours in a day but it’s only a matter of time before I form an opinion on each of them. However, I will wait for a value play before taking a position. Typically, when a stock is trading at the high end of its P/E range, I’ll hold off.
There is no reason why value plays such as Oracle can’t be combined with some of the momentum plays on the companies in your post. As you stated, Oracle is but one company in the total picture, of which several of the companies you mentioned are a part of.
One last item. I’m also a TC/2000 user. Would you share the Easy Scan and/or PCF code you used to identify your six stocks? Thanks for your input.
Joe |
