Speculative Alpha

The Case for Goldman

The brokerage stocks have had a nice run as of late due in large part to the tremedous deal flow that has worked its way into the capital markets. Generally speaking I am rather bullish on all the brokerage stocks but I do have one favorite in particular: Goldman Sachs (GS).  A quick look at the side-by-side comps will show a undervaluation that has taken place.  In the analysis below I have compared Goldman's numbers to its largest competitors (Lehman Bros, Merrill, Morgan Stanley, Schwab) by using my favorite six metrics. (click on picture for an enhanced image)

 

I like Goldman at this level.  They have spent more than $7 billion in repurchasing stock in FY05 and sports an ROE greater than 20%.  Always atop the League Tables and with net revenues increasing +20% on a year-to-year basis, the outlook appears to be favorable.  My research suggests that based on current earnings multiples, I expect GS trading higher than $150 per share within the next 12 months.  At $150 I think gets a bit closer to being fairly valued.

Consumer Tapped Out for '06?

As I research investment themes for next year, I quickly find myself surrounded by tons of fundamental and economic data some of which can be disturbing.  Of all the econ data that I run across, the one piece that reallys catchs my eye is Federal Reserve's Household Debt Service Payments as a % of Diposable Personal Income.  I checked the data going back to the early 80's and noticed the enormous boom...

Interesting data is it not?  I am of the opinion that at some point the consumer will have to pony up the cash to pay down this debt.  The increasing interest rates will force the consumer to do just that...as a result, I would play consumer services stocks very carefully over the next 12 months.  My initial consideration is to set an underweight status on the entire sector.

My Top Picks for 2005

Over the past year, my recommendations have produced stellar results.  In fact, my portfolios have outperformed the major averages thanks in large part to a surge in oil, tech, and international equities.  Here are just a handful of my winners for 2005:

• Google (GOOG) +45%
• Halliburton (HAL) +50%
• Goldman Sachs (GS) +21%
• Ultrapetroleum (UPL) +42%
• iShares Latin America (ILF) +31%
• Petrochina (PTR) +28%
• Chesapeake Energy (CHK) +60%
• Norfolk Southern (NSC) +22%

Generally speaking most of the stocks have seen their best days however a few still have some fuel in them.  I will outline those ideas in one of my next entries.

New Home Sales Tumble

Just another sign of a cooling real estate market: sales of new homes tumbled 11% in November which is the biggest drop in more than a decade. Clearly an indication that real estate will begin to moderate to normal levels. As a result, TOL (Toll Bros.) down 1%, DHI (DR Horton) down 2%, PHM (Pulte) down 2%...I would expect to see downward pressure in these stocks over the next 12 months as home inventories increase due primarily to higher interest rates.  Owners of these stocks that are holding onto gains from the past couple years should book profits now and move on...

Notable Upgrades/Downgrades

Notable Upgrade:

Transocean (RIG) - UBS raises from Neutrel to Buy with price target raised from $66 to $85 per share

Non-Traditional Portfolio Strategies

The foundation to any investment policy is to establish a trading strategy that will help achieve a set of stated predetermined performance goals.  Over the next couple of weeks I will be discussing in depth various non-traditional strategies.  These strategies are normally traded with individual equity securities and index ETFs preferably Barlcays iShares. The strategies I will cover are as follows:

Cash Equitization - maintain a fully-invested market position with index funds, S&P Futures, and short term fixed income securities

Tactical Rotation - actively trade around research, earnings, economic data, and/or sector bets

Tax Management - trading for short and long term tax efficiency

Risk Management - manage portfolio with only index funds and reallocating on a periodic basis

Concentration Reduction - using index funds to hedge the risk of a portfolio that is heavily concentrated in one security or segment of the market

Yield Enhancement - seeking high yielding securities with reasonable risk premiums

Market Neutral - using long and short exposure to lower standard deviation (measurement of risk)

These non-traditional strategies all have their specific purpose which I will be covering shortly.  Stay tuned for more

Tech Upgrades

We are currently undergoing a few technology upgrades.  We apologize for the delay but will be back online within the next 24 - 36 hours.  Thanks.

Money Managment Rules (Steps 1 & 2)

Money management is a way of life for those who trade on a consistent basis.  Time and time again we hear the same thing: "When do I sell?", "Should I hold onto it or just get out?", etc...

Well, over the course of my studies and experiences of the market I have run across a number of very good rules (over 20 that I have personally documented) in regards to money management that I think everyone can benefit from.  Here are a couple very important rules that I recommend you closely adhere to:

(1) Always use protective stops to secure large gains or after signifcant rallies in the market.  Consider placing sell stops at 5-8% points below the prevailing market prices.  You will frequently find that during seasonality rallies (such as the historical Nov and Dec move) it is always very good to consider placing tight sell stops on stocks that have have had strong runs. 

(2) Make purchases in small increments - This one is violated frequently. By breaking down our purchases into smaller mulitple trades we can avoid the trap of a bad cost basis and, potentially, purchase more shares at a more favorable entry point.

Google In, Microsoft Out

The WSJ is reporting that Google, the world's most used search engine, will cut a deal to pay $1 billion for a 5 percent stake in Time Warner's AOL unit.  In agreeing to the transaction, Google will display AOL links beside internet search results while  AOL will then have the ability to sell display ads on other web sites that use the Google ad system - in other words, Google gets to keep in "biggest customer".

Before this announcement, I was intrigued by the possibility of Time Warner potentially spinning off AOL as an IPO to "unlock shareholder value".  The irony of this strategic alternative was knowing that AOL founder Steve Case recently publicly stated he supported a spin off.  Amazing, when one considers that he initially orchestrated the failed deal which resulted in Time Warner writing down $100 billion in assets. 

Later this weekend, I will dive into the numbers and what it means to Microsoft's web strategy.  Stay tuned.

Site Construction

I appreciate your patience as I build this site.  This layout design should be complete by the 20th of December.  Again, I appreciate your patience and we shall soon search for the alpha.