Bargain shares after the fall on Nasdaq: Ebay?

In the light of the 10% fall on Nasdaq yesterday we have been wondering today what might be out there in the way of opportunities (from memory the Nasdaq has now fallen roughly 50% from its peak).

There was a wholesale sell-off in the tech sector and we wondered whether everything should be tarred with the same brush. Just how similar say, are Dell and Ebay and Google in reality?

If you were looking to do some bottom-fishing for an opportunity then perhaps some worthwhile characteristics would be:

  • a stock that was pretty well disliked
  • a stock that had a nice balance sheet
  • a stock that was well diversified across multiple markets and geographical sectors
  • a stock without a sky-high valuation
  • a stock where some of the analysis looks uninformed

People hate Ebay

Unlike internet darlings such as Google or, Ebay’s halo is regarded as slipped by a lot of people, including Peter Lynch style investors who think because they use a product and it works it’s worth buying. Have a look at a 5 year chart and you’ll see it was trading at $58 3 years ago, as compared to 20 bucks today.  Analysts are pretty well split and there is ton of negative publicity out there from pissed-off sellers which you can find appended as comments to any discussion of the stock objecting to everything from changes to feedback ratings to Ebay’s attempts to ‘encourage’ their buyers and sellers to use PayPal.

Ebay’s balance sheet

Doesn’t look too bad. At a guess I would say there are going to be a lot of opportunities out there if you’re pulling in free cash flow of $2.1bn (2007) and you’ve got $3.4 bn sitting round to pick up other nice businesses which are not in such a good position because they’re busily building market share and not worrying about cash or profits and investors don’t seem to like that at the moment. And after probably seriously overpaying (from memory $2.1bn) for Skype they are hopefully not going to make that mistake again too quickly (management change might also suggest that with the departure of Meg Whitman).

Ebay is diversified

With basically 3 businesses: payments in PayPal, the much smaller communications business with Skype, and the merchant side auction business, Ebay has a few different bets. From memory about 40% of their income comes from outside the USA too.

Ebay’s valuation

Float over to Morningstar and you find Ebay’s fair value estimate at about $40. They say consider buying at $30. You can find some competitor analysis here but their price/sales, price/cashflow and PEG don’t look bad compared to some of their peers like Amazon, Google, and Yahoo.

Ebay angles off the analyst radar screen?

There may be a few bright spots that are being underestimated:

  1. PayPal is growing fast. In Ebay’s Q1 2008 (April) financial results [Morningstar analyst quote] “total payment volume from the Paypal online payment service increased 17% on the eBay platform and a remarkable 61% off the platform” . By ‘off the platform’ they mean people using Paypal accounts to pay for other stuff via other websites. Whilst there are other competitors it looks to me like Ebay is leveraging their auction position (under the guise of ‘safety in transactions’) to push Paypal where some of their competitors like Google can’t – another situation where Ebay could establish a pretty dominant franchise.
  2. When money gets tight where do consumers go to buy the cheapest products? Pawnbrokers seem to have been valued on the basis that they might benefit from a switch downmarket as with cheap supermarket chains like Aldi. Why not Ebay?
  3. Skype seems to be working better and better – there are lots of VOIP plays out there but call quality to normal phones seems to be good and there’s not a lot of other options when it comes to the utility of knowing people are there waiting to take your call and quick and easy ad hoc conferencing. For small businesses you could argue that Skype is becoming essential.

Other analysis of Ebay


Motley Fool:

Posted under individual stocks

This post was written by mike on September 30, 2008

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When there’s panic, it’s the best time to buy!

Having recently lived through the most dramatic trading week in living memory, it seemed like a good time to revisit the impact on long term performance of trying to time the market. Looking at the long term performance of the main investment indices of both the US and the UK stock markets produce similar conclusions.

The compound average annual return of the FTSE from June 1986 to June 2008 was 10%. If you missed the 10 worst days during this 22 year period, your annual compound return would have risen to 13%. A study of the S&P 500 from 1979 to 2004 shows an even more dramatic impact. If you missed the worst 10 days investing the in S&P 500 during this 25 year period, your annual compound return would have risen from10% to 38%!

If you were wise enough to look around you during the last couple of years and realise that booming global economic growth based on the apparently infinitely deep pockets of US consumers was unsustainable, congratulations! Perhaps you were even clever enough to reduce your exposure to sky high asset valuations in both property and equities. In which case you are already well on the way to achieving a much better return than those who believed the party would last forever!

But… even if you believe as I do, that we are at the beginning of a nasty global recession which may last 3-5 years, and which will see substantial rises in unemployment and slowing economic growth from Los Angeles to Beijing, it does not pay to wait for the young green shoots of economic growth to emerge before reinvesting in the equity market.

If you missed the 10 best days of the FTSE during the 22 year period from 1986 to 2008, your annual compound return would have fallen from 9.8% to 7.4%. If you missed the 10 best days of the S&P 500 during the 25 year period from 1979 to 2004, your annualized return would have fallen from +10% to -10%.

Cleary these are idealistic scenarios and nobody gets it right all the time, but given that Thursday 18th September was one of the worst market days in living memory, it’s probably fair to assume it will turn out to be one of the ten worst days this decade. For those brave or crazy enough to buy as the lemmings jumped, Friday 19th September turned out to be one of the best market days in living memory! The FTSE 100 closed up 8.8% – the biggest daily gain in its 24 year history.

Yes, the global crackdown on short sellers was no doubt a catalyst, and the $700 billion dollar promised “temporary asset relief programme” bailout by US Treasury Secretary Paulson had a dramatic impact on short term sentiment. Nevertheless I’m willing to bet that starting to buy on the dips will turn out to be a great long term strategy.

It usually pays to be contrarian. Global markets are likely to fall further and will bounce along the bottom for some time. But with global valuations some 25% below where they were a year ago, the risks have subtly shifted so that there’s probably now more to lose by being out of market than being in!

Posted under market timing

This post was written by ex-fund-manager on September 29, 2008

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Index/tracker funds: management costs & selling discipline

When it comes to investment strategy for self managed super funds or self invested personal pension plans, unless you are a retiree with lots of time on your hands or a very competent stock picker, index/tracker funds or actively managed funds are probably going to play some role.

In making the choice for your SMSF strategy between passive trackers and actively managed funds there are two commonly cited reasons as to why you should choose passive versus actively managed funds:

1. Cost – and specifically the impact of management costs over the long period of a superannuation fund investment. According to Rainmaker’s most recent survey, cited in the Australian, “the fee varies according to what you buy: workplace super funds average 1.41 per cent, personal super funds average 2.03 per cent and retirement funds average 1.86 per cent. ‘Out of that, the weighted industry average is 1.36 per cent,’ says Andrew Keevers, Rainmaker’s associate director of research.”

Of course this includes ‘unavoidable’ costs like compliance costs but it also includes perhaps more avoidable costs like trailing sales commissions paid to advisors.  It is not an entirely fair comparison (simply because it does not include super-specific running costs) but the management expenses of something like the iShares IJP tracker runs at .5% (and that’s not the cheapest tracker around).

1% or so difference between an actively managed fund and a tracker doesn’t sound like much on the face of it but the impact of just 1% over a longer period can be quite high. For example, from memory the average SMSF in Australia is around $250,000. Assume two SMSFs, one with passive trackers, one with actively managed funds (with slightly higher expenses) are both held for 15 years starting with a balance of $100,000 (to make it simple I have assumed no new contributions). Assume the same return of 6% p.a. (see point 2 below about returns) but a 1% higher management fee in the actively managed fund so the net return on the passively managed SMSF (after expenses) is 5% and the net return on the actively managed SMSF (after expenses) is 4%:

Passively managed SMSF Number of years passed Annual return after management fee Final value
$100,000.00 15 5.00% $207,892.82
Actively managed SMSF Number of years passed Annual return after management fee Final value
$100,000.00 15 4.00% $180,094.35

So a 1% difference in returns compounded over 15 years leads to a 20% difference in the value of the fund on retirement … now imagine the impact with new contributions every year plus longer timelines given increasing life expectancy

2. Returns – tend to be lower in most managed funds than passive funds. Whilst individual managers may have periods of outperformance this tends not to last.  It is sometimes thought that active fund managers may perform better in bear markets, but even this doesn’t look like it is true:

“Lipper Inc. studied active managers’ performances in bear markets (defined as a drop of 10% or more in the equity markets). Lipper found that active managers underperformed the S&P 500 Index in the six market corrections occurring between August 31, 1978, and October 11, 1990. For example, the average loss for the S&P 500 Index in these episodes was 15.1%, compared with a 17.0% average loss for large-cap growth funds.” [Source Vanguard

Both these points are commonly cited when it comes to comparing active management and tracker funds. However the advantage that you do not see mentioned so much relates to entry and exits.

Whether you are picking stocks yourself, or paying an active manager to do it for you, it often seems like the hard part is knowing when to sell … knowing when to buy is much easier.

For instance, if you are a value investor (you tend to buy stocks that you think are undervalued on say price/sales ratios or PE or whatever) broadly speaking one of two things is likely to happen, you were right (it was undervalued and the price goes up), or you were wrong (it was actually overvalued because it had a load of debt that it is having trouble refinancing and that wasn’t captured in the ratios you used).

Assuming you picked well at what point do you sell? When it’s priced at the correct ratio? What if things have changed in the business and it’s long run returns look better?

And if you picked badly how do you recognise this? If you are a value investor a la Mr Buffett you’re supposed to ignore the price falling and just buy more … but what if the fundamentals in the industry have changed (like Mr Buffett you quite like the newspaper industry but increasingly everyone is getting their news for free online)?

Add to this the well known predilection that people have for finding it hard to cut their losses and finding it equally hard to let their profits run, rather than take them too quickly, and it is easy to understand why so many private investors (and fund managers!) end up portfolios full of dogs. It’s not that they can’t recognise value when they see it: it’s that they can’t recognise when they’re wrong, and equally they don’t know when to sell when they’re right…

The great advantage of tracker funds is that they make these buying and selling decisions for you without your emotions coming into it (and without your time being spent on constant re-evaluation of your picks).

Posted under index trackers, investment strategies

This post was written by mike on September 21, 2008

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Long term recession or ‘are we anywhere near the bottom’?

With the problems at Merrill Lynch, AIG, and collapse of Lehmans, there will be some people who have been sitting on the sidelines in cash who may think this is a bleak enough moment to start dribbling cash into the market.

This is not one of those ‘on the one hand & on the other hand’ articles in that I spent 10% of my SMSF cash holdings today on buying 3 (fairly poorly researched) index trackers, but as someone noted to me this evening it is easy to want to get back in too quickly (the possibly apocryphal example given was that of JP Morgan who waited from 1929 to 1939 to start buying again).

The same person noted that that ASX index had now fallen from 6800 to 4799 but that the next support level was at 4200 (confession: I neither believe in or understand charting in anything but a rudimentary sense when it comes to equities).

There was some muttering about if we hit 4200 we would be in for “10 years of poor returns”.

‘Typical bear markets’ fall 25% and that is where we are now in most major markets.

So I went looking today for poor performing markets over the last couple of years where I could start to nibble at low cost index trackers, which had gone on to fall even more after the weekend’s events.

I ended up buying small holdings in 3 iShares trackers that just happen to be in Asia that have not performed very well over the last 5 years and have fallen even further over the last few days (the charts are for the underlying indices and not the tracker):

IJP – (iShares MSCI Japan)
IKO – (iShares MSCI Korea)
ITW – (iShares MSCI Taiwan)

I am even tempted increasingly by the S&P500 which got to 1500 last year and is now sitting 20% lower just below 1200 (back where it was in 1998!) but wonder if there will be another US dollar fall that might be a better entry point given that I am not a US resident (the USD is up 10% against the $A in the last few weeks).

Posted under index trackers, market timing

This post was written by mike on September 16, 2008


Legislative risk – or “I’d rather have the cash now thank you”

Whether you put money into a SIPP or SMSF, in the back of everyone’s mind is the question (especially with voluntary contributions) of whether it makes sense to lock your money up in this way.

In Australia the point comes to the fore more with voluntary contributions as superannuation is compulsory at 9% of salary (so it’s not as if you have a choice on salary as to whether you contribute or not).

The Australian government made contributions compulsory in 1992 – if ever the UK government does the same buy an index fund or better still buy stock in a fund manager – estimates put the ‘new’ savings engendered by this move in Australia at 62c on the dollar.

The key point is obviously that you cannot access the money contributed to pensions/super until ‘preservation age’ (in Australia 60 years of age for most people who are not close to retirement).

Want to take the holiday of a lifetime before 60 on this money – you can’t.  Want to give a lump sum to a child – you can’t.

There are some exceptions for hardship, so if you’re starving in a garrett at 55 you will probably be able to get access to your super before preservation age, but that’s about it. If you die relatively young (although it would have to  be abnormally young – average life expectancy in Australia is now about 80; for the UK it’s 78) this could prove seriously annoying.

Some other more governmental / political risks might be:

  • between now and your retirement the government in its wisdom decides to change preservation age. In 1997 the Australian government pushed back the ‘preservation age’ by a whole 5 years from 55 to 60. Presumably the thinking behind this, as with much of the government’s rationale, was to stop people cashing in their super relatively early and then relying on State benefits in the later stages of life. What are the chances of this happening again? Probably relatively high…. But bear in mind that last time they did it they ‘tapered’ the results so that those close to the previous preservation age could still obtain most of their superannuation at close to the old figure of 55 years old
  • the government decides to change the tax rate on super from the current 15% level (in Australia). However if they did this it would be unlikely to be retrospective so it would only affect ‘future’ income and not the balance you had already built up. You could hope that perhaps you would be able to transfer the fund offshore and still retain the benefits but who knows. Against this you need to balance the significant difference in tax rates on money in super funds and money outside super. At the average income in Australia (around $49,000) you are paying a marginal tax rate of 30% for everything over $30,000 and 40% over $75,000. Against this, a tax rate of 15% for money in your super fund looks pretty attractive (if at some stage of your life you’re earning less than $30,000 it might be worth keeping your money outside a super fund – you pay the same tax rate of 15%).

A perhaps more common scenario is where a new investment opportunity arises which if you were not self managing your super/pension you could not take advantage of this because you were constrained by the options on offer from your managed fund.  With the new ability to even buy property in a fund there is a lot of freedom, although you cannot borrow, so if you are fond of margin lending to finance your share portfolio you can’t do this in a SMSF. All in all though, having a self managed fund does not greatly restrict your options, assuming you are a relatively conservative investor.

Posted under Risk, Setup

This post was written by mike on September 13, 2008

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