Fadi El-Eter

One of the few stocks that I really love is RIG. I was checking it today to see if it’s at a “buy” price. The price was $69.71, which I feel is an attractive price, but not that attractive. However, when you look at RIG’s P/E (9.06), the current stock price is dirt cheap. I took a look at three public offshore drilling companies: Noble Corporation (NE), Diamond Offshore Drilling (DO), and Pride International (PDE). I examined their P/E as well as their highest price throughout their history.

NE has a P/E of 8.03, less than that of RIG’s, and as far as I remember, never experienced problems with its installations (explosions, etc…). The stock’s highest price was around $65 back in May of 2008, making its highest P/E (assuming EPS was the same back then as it is right now) around 15.

DO has a P/E of 9.06 (which, oddly enough, is exactly the same as RIG’s). DO also never experienced any problem with its installations. Its highest price was $143, recorded in December of 2007. This means that the highest P/E (also assuming EPS has never changed) around 19.5.

With a P/E as high as 35, PDE looks to be overvalued and spoiled by the investors. Although it never experienced any serious problems with any of its installations, PDE seems to be trading way above the average of the whole industry. PDE’s highest price was back in June of 2008 when the stock reached $47.79, which means that its highest P/E (again, assuming its EPS did not change) around 53.

Companies trading at a P/E lower than 10 always attract me, but, with the exception of PDE, a P/E of 8 – 9 seems to be the standard in this industry. That doesn’t mean that these companies are not undervalued. All these stocks were adversely affected by the oil spill back in April of 2010 and the ensuing regulations. But now even the offshore drilling ban is lifted, this means that these companies have the potential to make more wells, and consequently, make more money, but obviously, the market is slow in assessing the current situation that favors the business that these companies are conducting.

I think the whole offshore drilling industry is way undervalued, but I expect a reversal in the trend next year, where at least a P/E of 12 will be the norm. I would invest in all the companies mentioned above, with the exception of PDE, which I think is trading above its real value.

There are many Chinese Stocks listed in the US market nowadays. In fact, there are too many! Investors, especially day traders, apparently make a decent amount of money with these stocks, usually betting on an upward trend.

But, we all know that the market capitalization of any company is really debt that the company has, at one point or the other, pay back. This is where I get skeptical when it comes to Chinese stocks. What if that company doesn’t want to pay back the money, and is there just to screw investors, who are willing to risk their money by believing in the future of that company. What forces a foreign company trading in the US stock market, that really has no customers in the US, to pay its debts.

There are many Chinese companies that I’m sure will never be able to pay back their debts, including Youku.com (a company that was listed almost a couple of weeks ago). I discussed, in detail, why YOKU is overvalued and why this company will never ever be able to generate any serious revenue, let alone paying dividends or caring about investors. YOKU is currently trading at $30.68, down almost three dollars from when I first examined it nearly a week ago. I predict this stock will experience a huge retreat once it drops below the $30 level. Anything that’s keeping the stock at the current price level is just pure speculation, and large investors waiting for the right time to get out.

Now Youku.com doesn’t care if it will ever make money or not, and it won’t!

The problem is that most investors are treating China as if it’s another United States, with 4 times the population, and the same GDP per capita. This last part of the previous statement is completely wrong, and even if it’s true, the spending habits of the Chinese in general are much more conservative than those of Americans. They buy less and they like paying much less (there’s nothing wrong with that, but this means that spending can never be the same). Investors keep on thinking that even if this is not true, then it will be true in a few years… Have you seen what happened to Japan?

Here’s a Chinese company that went belly up, RINO which was kicked out of NASDAQ because of fraud. I feel sympathy for all the investors who lost money on this stock. RINO is now listed in the PINK market.

Now I’m not saying that all Chinese Stocks are bad, but the assumption that all Chinese stocks are always set to explode is creating a speculation that is inflating Chinese stock prices to unrealistic levels. And who gets hurt? Always the small investor…

Still, some Chinese Stocks are good (especially those depending on the world market), but not all of them are. After all, all that glitters is not gold.

Financials in general did not do well in the second half of 2010, plagued by regulations, rumors, and world riots. Not to mention, of course, that the largest banks are still losing money. One financial company though is making money, has been somehow stable since the financial meltdown of 2008-2009, and is trading at a mere P/E of 12.25. This company is Morgan Stanley.

I’ve been watching MS for quite a while now, almost buying it when it was trading at a ridiculous $24.70 a month or so ago. Even the price right now is still ridiculously cheap, but unless there is an overall reversal in the trend in the financial sector, then don’t expect this stock to break the $28 level. But when that reversal happens (and it cannot BUT happen), then expect the stock to skyrocket. Here’s why:

MS is a very solid company, and there’s rarely, if ever, bad news coming about this company. The stock goes down only when it’s a week day when ti comes to financials in general, and not because of problems with the Morgan Stanley as a company. In fact for the last while, I’ve been only hearing good news about this company, news that are still not reflected well in the current price tag of the stock. Even when GS lowered the estimate on MS this morning, they clearly stated that MS had a very good year.

The stock is currently trading at the $26 level, I would wait until the stock drops to $25.50 for a good entry point. But for a long term investment, even $27 is a good entry price, after all, if we are to give a fair pricing of this stock (P/E X 20), then we can easily say that $42 is a very fair price. Everyone thinks that next year will be the year for the financials, all of them are beaten to near death, and if that happens, expect your investment with MS to nearly double by the end of 2011 if you buy today.

I have watched both YOKU and DANG stocks in the past week, when they started trading last Wednesday. In 3 trading days, YOKU was up over 42% (at one point on Friday, YOKU touched $50 and thus was up almost 100%, I feel sad for those who bought at this price), and DANG was up over 31%.

Now what are YOKU and DANG?

YOKU is a stock for a Chinese YouTube clone, youku.com. DANG is the stock ticker for dangdang.com (yet another) Chinese company, but this one is cloning Amazon.

Now I have visited both Youku.com and DangDang.com, but seeing how I don’t understand Chinese, I just looked at the pictures there, and I wondered. At the current price, Youku.com has a market capitalization of $2.5 Billion and DangDang has a market capitalization of $600 million. Let’s do the comparison apple by apple.

Google acquired YouTube for $1.65 billion back in 2006 (just over 4 years ago), the online video arm of the company that despite being very popular, is still considered to be a liability for Google despite some people believing that it has just started making money. Now let’s compare YouTube.com to Youku.com, to see how much the latter is worth:

Youtube.com caters for the whole world, and even assuming that China is not part of that world Youtube.com (which is a false assumption), this means that Youtube’s potential audience is 5.4 billion. Assuming that Youku.com controls all of the Chinese online video market (another false assumption, but I’m trying to see what the maximum value of Youku.com is), this means that Youku.com may serve 1.3 billion people. Assuming that the American and international audience are worth the same as the Chinese audience when it comes to converting for ads, this means that Youku.com should be valued at a maximum of 1/4 the value of Youtube.com, which is about $412 million, and with 66.32 million shares, then YOKU’s realistic price is $6.21, so it is trading right now at 6 times that amount. But is this realistic price fair? I don’t think so…

See we’re assuming that YouTube was worth the $1.65 billion in the first place, but this false. Youtube.com is a website that can be easily cloned (with 1000s of clones out there, including Youku.com) and is a big hole in Google’s pockets (all that money spent on bandwidth and the maintenance of the website). I think Google’s long term aims from YouTube is the publicity and the viralness (I don’t know if that’s a word…), and hey, it’s even better if it makes some money here and there, just to cover it costs, but Google doesn’t care if YouTube is making money or not, nor do Google investors, who are confident that Google can support YouTube as well as the myriad of other money-losing products they (by “they” I mean Google) bought.

Youku.com is a completely different case:

– Youku.com is not supported by, let’s say, Baidu.com (Google’s Chinese clone). Youku.com is taking the money directly from investors, money that can be easily burned in a few years of this website’s operations, with not even a dime of income. I know that investing in stocks is a long term vision of the company, but this company will never ever make money. The Chinese market can never be compared to the American and European markets.
– If Youku.com fails, it will file for bankruptcy immediately, not a single sane financial institution will support its business model.
– China’s economy is cooling, they cannot sustain this growth forever. The US economy, on the other hand, is recovering.
– Youku.com will probably be sued by dozens of Viacoms over copyright infringement issue. Of course, Chinese websites don’t care a lot about copyright issues, but when you’re trading in the US market, you’re most likely bound by their rules. In all fairness, most probably the only content on Youku’s website will probably be real pirated movies and stupid videos.

Those who made money in the first few days should get out of this stock, fast! Those who are duped into believing that this is a great long term investment should rethink their investment strategy.

Now let’s move to DangDang.com…

As stated earlier, DangDang.com is an Amazon clone. Amazon currently has a market capitalization of about $78 billion, but with a P/E of 71 (AMZN is currently trading at $175), Amazon is a highly overvalued company. At this current valuation, it’ll take Amazon just over 70 years to repay investors with its current earnings. A much realistic P/E is 25, which values the company at $27.5 billion, a fair amount that DangDang can be compared to. Going into the same discussion above (International market size and Chinese market size), we can easily calculate that the DangDang can be worth $27.5 / 4 = $6.85 billion, making the stock price a hefty $373. But DangDang does not control the Chinese market, even Amazon has a bigger share in that market (which is something we completely ignored in our calculation, we assumed that Amazon does not even exist in China), and how big is the online Chinese book market compared to the US one anyway? Amazon.com ranks #5 in the top 100 websites in the US (according to Alexa), while Amazon.cn ranks #77, one spot above DangDang’s (which ranks at #78). This clearly means that interest in books in general is much lower in China than in the US, about 15 times lower. Now by taking the $373 we calculated before, and dividing that number over 15, we would get $24.86, which is very interestingly, the same price that DANG started trading for back on Wednesday:

So are they real? Yes, they’re both real, the websites for these 2 stocks exist, and are very prominent in China. Scam? Maybe not… Overvalued? Definitely… But DangDang.com, as a company, has a much better chance of repaying investors than Youku.com.

BAC continued its rebound today, up 65 cents (or 5.42%) from yesterday’s closing. BAC reached a high of $12.69. What’s interesting today is that BAC broke through 2 resistances, the $12.06 resistance (tested 6 times) and the $12.36 resistance (tested 3 times). If the stock closes above the $13 level tomorrow (which can easily happen if the stock breaks $12.91 resistance – tested 7 times), then we will hopefully see a major buying spree in the next couple of weeks. BAC is an extremely undervalued stock, the real stock price should be at least double the current price. If you have any doubts, look at its short ratio, it’s a ridiculous 0.4%, which means that investors are shorting it just to protect their long positions, and not because they think it’s gonna go down.

I believe that next year will be the year where all the financials will rebound. You can already see this in BAC, C, JPM, and MS. All the bad news are already cooked into these stocks, and all of them are way undervalued, so there’s little room for them to go down.

To whoever held his financial stocks through the (mostly) bad days in the second half of 2009, I like to say the following: “Patience is a virtue” and “Patience pays off”.

I “reported” before the market open that SIRI jumped considerably in the pre-market. Well at that time I didn’t know why, but now I do. It’s because of this. Yes, Howard Stern, in all his magnificence, decided to stay with Sirius XM radio.

I have a few thousand shares of SIRI myself, and although I’m happy that the stock is finally going up, I don’t think this is good news for the company (it is excellent news for Howard Stern though).

Why?

Howard Stern’s contract is worth $500 million, or almost 9% of Sirius’ total market capitalization (valued at $5.5 billion at the current share price). Howard Stern is costly, and I don’t know how much trash and nonsense he has left to throw at people for the next 5 years (the contract is through 2015) to keep them interested.

Sirius was a funny stock a few months ago when I first examined it, but then I took another look and I found it’s undervalued, not because the satellite radio has Howard Stern, but because nearly every new car in North America comes with Siriux XM Radio already built-in, and most people actually subscribe to the service after their free months expire.

Sirius, in my opinion, is doing better by itself, and doesn’t need to rely on one person (with a shrinking popularity and media interest since the second half of this decade) to lift the company. What if that person dies? What will happen to the company, and more importantly, to SIRI? And even more importantly, to those investors holding SIRI?

The $500 million that are being spent on Howard Stern are much better spent elsewhere, like in creating new shows, hiring new talents, expanding into new territories (Europe, and the Middle East) and cultures. This will make Sirius a famous brand across the world, not just on a continent with a struggling economy.

Sirius has 3.93 billion shares, nearly 4 times the number of shares for Apple, but don’t expect its price to reach anywhere near 1% of Apple’s share price, even by the end of next year, unless they clean up their act and have a better vision for the future.

BAC and SIRI are way up in the pre-market.

BAC is currently up 22 cents (or 1.83%), trading at $12.22 in the pre-market, and SIRI is up 9 cents (or 7.22%), trading at $1.41 in the pre-market. I could’ve sworn that I saw SIRI trading at $1.48 at one point the pre-market.

This should be an exciting day for both stocks. Let’s see…

Bank of America (BAC) closed today at the $12 level. This is, in my opinion, a very important psychological turn in the trend of the stock, which, until this very moment, is still bearish. However, as I stated earlier today, closing at this level can make the stock run and easily break the $13 level in a few days, that is, provided we don’t have anymore bad news hitting us from Europe in the next week.

Closing above $12 means that investors think that BAC has been beaten well enough now and needs to go out of its “depressed” state. This stock has been undervalued for so long and the subject of many stories and gossip. Not to mention, of course, that a lot of investors out there, including me, have sad stories about BAC, as it became extremely disappointing as of August.

What would be really interesting is if BAC closes above $13 this Friday, if this happens, then next week expect BAC to shoot for the moon. I own some shares of BAC that I bought at $12.40 a few weeks ago.

Next week is the official start of the end of year bullish season; historically most non-bear stocks go up at this point.

Whatever happens, it would be very exciting to watch BAC in the next week or so.

I bought some HOD‘s at $8.23 a piece last week. I thought it was a good price, until, of course, GS thought otherwise. As you may probably know, oil broke the $90 level in the span of a few days, thanks to GS’s prediction of oil hitting $110 next year, and $120 by the end of 2012, hinting that oil is undervalued at the current price level.

The problem was that I really needed the money I invested in those HODs (which is breaking the number one rule when trading, never play with money that you need), so I put a Sell on Stop to minimize my losses, the sell on stop was first set to $7.50. For crazy reasons (live and learn), I upped my limit to $7.65 two days ago (Monday evening), because the stock was going up (oil started to retreat a bit), and I thought that was better protection for me. Wrong…

For reasons only known to God, oil went up like crazy in the early morning of Tuesday, driving the stock below my threshold of $7.65, I saw that oil was going up crazily before the market opened, yet, because I really needed the money, I was sentimental and I didn’t change my threshold to lower. Additionally, I thought I was trading against the trend even before the GS news when I bought the HODs. I was very emotional (Being emotional is one of the top trading mistakes). How can you not be emotional when you need the money? I used to make money on every trade, and I started losing money on some trades only when I started actually needing the money!

Anyway, as I stated, the stock dropped down considerably in the morning, take a look at the following image (courtesy Google Finance):

So what happened because there was a lot of panic in bear oil ETFs because of the spike in the morning, the stock dropped to the $7.55 level. Needless to say, my trade was triggered, but not at the $7.65 level of course, it was triggered at the $7.55. Now, of course, the stock went up over the $7.90 level by the end of day, as oil kept on going down.

It was a costly and a stressful experience, but I learned some excellent lessons from it:

– Never, ever buy any stock when you need the money. Oddly enough it was something that I have warned against in my little explanation on HOU and HOD.
– Set your Sell on Stop to a very low value: Your sell on stop should only be triggered when the stock reaches a price that is totally unacceptable to you. Stocks fluctuate, and, unless you’re day trading, you should accept this fact.
– Only increase your Sell on Stop when you are making money on the stock, not when you are still in the losing area: Let’s take my trade as an example. As the stock went up while I was still losing money, I upped my Sell on Stop threshold, to minimize my losses, but by doing so, I increased the risk that if the stock goes down even less than I accounted for earlier, I would lose money. Now the wise thing to do was to wait for the stock to go above my trading price, let’s say to $8.50, and then set a threshold at $8.40, and then increase my threshold as the stock goes up. This way I will increase my earnings on the stock (by increasing the threshold as the stock goes up), and minimize my losses (by setting a very low threshold if I’m losing money on the stock).
– Finally, something that I have yet to learn, never ever be emotional with stocks. Although it’s hard not to do that when you’re losing/making money, doing so will be even harder when you need the money. Always play with risk money (money that you don’t need to fulfill your different financial obligations and won’t adversely affect your lifestyle should you lose it). Accepting loss as a necessary part of the game and practice will make you perfect.

Apparently, BAC is now rebounding, and is has broken the huge resistance located at the $12 level a few minutes ago. On a rather slow day, BAC is now up 44 cents (at $12.01), or nearly 4%.

To put things into perspective, let’s compare it to other financials:

C is trading 1 cent lower at $4.61 (C, a resilient stock, has been consistently up for the last few days, so probably it’s time for a little correction).
JPM is trading 91 cents higher at $40.16.
MS is trading 92 cents higher at $26.56.

I think BAC will put this bad year behind it next year, which would make it a very profitable stock. BAC can easily return to the $18 level by February of 2011 if no more bad news are coming (and if there are more bad news, then there is little room for this stock to go down).

If the stock manages to close above $12, and more importantly, above the 50 day moving average of $12.09, then the stock can easily break the $13 level in the next few days. The most important thing to close above $12, and everything should be OK.

Let’s see…