New Glossary Page Added!

First of all, big thank you to all the friends who checked out the blog yesterday!  Thanks to some valuable feedback there is a new glossary page up on the site.  There you’ll find explanations of phrases I commonly use on the site and I’ll keep adding as new phrases come up.

For now it features definitions such as:

Long –  Buying a stock you assume will increase in value. I.e. You buy Apple at $500 and sell it for $520 (and make a $20 profit).  This is the most basic investing move.  Winning strategy: Buy low, sell high.

Short – Selling a stock with the agreement to buy it back at a different price.  Let’s say I buy Apple at $520 now, assuming the price is going to fall.  I get $520 up front, but I have to buy it later so I have something to sell.  If the price drops to $500, I make a $20 profit. Winning strategy: Sell high, buy low.

Bull – Bulls are optimistic about prices going up.  A bull market is one where prices are going up and sentiment is good.  Longs like bull markets.  Reminder: a bull’s horns point upwards.

Bear – Bears are pessimistic and assume prices will fall.   A bear market is one where prices are going down and sentiment is bad. Shorts like bear markets.  Reminder: A bear drops to the ground.

Hope everyone has a wonderful holiday weekend!

Will Abercrombie’s cuts of logos and prices put it back in fashion?

When I was 13, Abercrombie & Fitch (ANF) was my favorite store. Everyone my age thought they had the coolest jeans, t-shirts, and bags, and you almost always ran into a friend from school shopping there too. But as soon as I was old enough to graduate into the “adult” clothes store, the brand lost its luster. And now I cringe every time I pass the tackiness that is the Abercrombie store in New York, with models posing in front for tourists.

A year ago though, I grew to love ANF once again (albeit for a very brief period). Right before earnings last August, I shorted the stock. This was the first earnings report following the CEO’s comments that Abercrombie is not meant for overweight people, and I figured their bottom line would take a serious hit thanks to the backlash. Sure enough, earnings were a miss, the stock nosedived, and I made a 25% profit overnight.

Abercrombie reported earnings again this morning. Results weren’t expected to be great since over the past four quarters the retailer’s sales have fallen by an average of 9% year over year. However, analysts predicted the sales losses to at least slow to 4% this quarter.

This morning, ANF announced earnings per share (EPS) of $0.19 and revenues of $890.6 million, vs. EPS of $0.16 and revenues of $945.7 million in the same quarter a year ago. Same-store sales in the United States fell 9% and direct-to-consumer sales rose 5% for a combined decline of 5%. Revenue was lower than analyst expectations of $909.22 million, but earnings were higher than the expected $0.11.

Shares are down about 4% today after the earnings. Financially, the earnings report creates a mixed case. While the decline in revenues and same store sales represents a shrinking demand base, it’s shrinking slower than it was a year ago and the all-important net income is improving.

What is clear is that this company is going nowhere fast unless it makes some serious changes. What’s interesting is that ANF seems to have gotten this memo and has been starting to implement changes to better appeal to consumers.

First, Abercrombie is addressing the fact that its prices are too high compared to competitors such as H&M and Zara. Abercrombie is planning to bring its prices down to a more competitive level. To prevent pressure on its gross margins (in theory if you lower price you should also lower cost so your income doesn’t take a hit), the company is going to attempt to lower its administrative expenses and find cheaper sources for its clothing.

Abercrombie is making big moves on the fashion side as well. First, it’s focusing on bringing fast fashion into its products (similar to H&M or Zara where clothes are made and brought to stores quickly to meet current fashion trends). The company is also testing all of its new products before they’re put in stores to make sure they’ll appeal to consumers.

Even more impressive, Abercrombie is getting rid of one of the hallmark attributes of its clothing by eliminating its logo heavy clothing. Apparently no one wants ANF stamped across their chest anymore. The company made the announcement in its earnings call this morning.

Lots of big changes are underfoot at ANF. While I don’t like the stock as a long-term holding (I’d say no more than 2 years), you could move on the company’s strategic improvements. It may be worthwhile to buy now while the stock price is low post-earnings and hold for a few more earnings results to see if the changes make a positive impact on financials and share prices.

How I Played TSL’s Earnings Report Today

Trina Solar (TSL) is probably one of my most talked about stocks on this site. For the past year it has been my favorite swing trade stock since it tends to follow a pretty solid pattern. Plus, I believe we’ll be seeing an uptick in solar power demand in the near future, and I like TSL and CSIQ specifically as long term solar buys. This means I’m never very worried when I’m in a long TSL position, even if it’s trading down.

As is often the case, I have been long TSL for the past few months. TSL was set to report second quarter earnings this morning, and the stock had been trending upwards for the past week leading up to the results. While normally this is a good thing, I had been seeing rumblings among traders (oh, how I love StockTwits and Estimize) that earnings would be a miss due to rising prices for parts that TSL uses. Plus, the run up before earnings meant that there was less room for upside growth if earnings did go well.

TSL's performance the past few days

TSL’s performance the past few days

I was pretty confident that the stock would go down after earnings, so I figured I would take my money and run while the stock was still up. Yesterday I sold all of my shares of TSL at $13.40 a share, for a small but decent return.

But, it’s always better to profit than just avoid a loss, so I figured I would capitalize on the potential fall today. Shortly after I sold my shares yesterday, I sold short 750 shares at $13.30 each (essentially sold at $13.30 and agreed to buy them back later at a hopefully lower price).

Sure enough, TSL earnings were off and the stock is down over 8% today. Revenues came in at $519.4 million, an increase of 16.8% over the previous quarter, but lower than revenue estimates. Plus, profits were down because of a higher cost of goods sold.

By the way, none of these earnings results change my position as bullish on TSL long term. Even though revenues were lower than expected, they still showed significant growth over the prior quarter and the past year at 18%. In a growing company I focus more on revenue growth (anticipated to be both for the company and the solar market) than anything else.

But for now I am quite the happy camper that TSL is trading down. Given my short position I was more conservative than I am with a long (with a long position your loss is capped at how much you bought the stock for; with a short the loss potential is unlimited), and so I “bought to cover” my short shares at $12.45. This left me with a 6.4% profit – not too shabby for a day’s work!

You Can’t Keep a Good Index Down: Why the S&P 500 is at an All-Time High

Cheering + moustache = win.  Source: money.cnn.com

August started out looking like it would be a tough month for the markets. Stocks were down widely due to quite a few international issues – Russia and Ukraine, Iraq, and Gaza and Israel. Overall, the S&P 500 (the index that tracks 500 of the largest companies on the US stock exchanges, and a commonly used measure of the US economy) had the biggest weekly decline in almost 2 years in the first week in August.

Luckily though, things look like they have turned around over the course of the month. Today the S&P 500 closed at 1,992 – the highest it’s ever closed. The Dow Jones Industrial Average was close to its all-time high as well.

The main reason for today’s impressive results was yesterday’s Fed meeting. While the economy was in recession the past few years, the US Federal Reserve kept interest rates low to spur economic recovery. Low interest rates spur spending, and thus economic growth, because it’s easier and cheaper to borrow money. So after the housing crash not only were you encouraged to buy a house and lock in low interest rates, but spending less on your mortgage interest payments means you can spend more in the marketplace.

Low interest rates are also good for the stock market because they encourage people to invest in stocks rather than bonds. If interest rates are low you get a lower return on your bond investments and thus stocks look like a more profitable investment (with inflation, bonds are about worthless right now). For the most part stock and bond investments have an inverse relationship.

Now that the economy is improving, people are worried that the Fed will hike interest rates back up, thus indirectly moving money out of the stock market. At the meeting yesterday though, the Fed indicated that they will continue to depress interest rates for the time being. This means the market gets to reap the benefits of good economic reports – i.e. fewer Americans than expected filed for unemployment last week, HP had a great earnings beat, US home purchases are up – without worrying about interest rates rising.

That double whammy of positive news left the markets in a great place today. Plus, it was good to see that the market recovered extremely quickly from the slump in early August. This indicates a stability towards the bullish side.

Budgets pt. 2: Check out how your budget stacks up to the US average

As a follow up to the budgeting post from Tuesday, a reader recently sent me an interesting dashboard her company had created. They used data from the Bureau of Labor Statistics to create a visual app of how Americans are spending their money, and how education influences those buying decisions.

retale

The dashboard was created by Retale, an app that shows you coupons at retailers in your area. The app may be worth checking out if you are looking to shave some dollars off your spending.

I found the results of the dashboard to be enlightening. Housing and transportation costs alone comprise about 50% of average household spending. Add in healthcare and food and you’re looking at about 70% of household spending being chewed up by relatively fixed costs.

What was even more interesting was that in almost all categories, a higher percentage of household income was taken up for those with less education. For example, spending on housing takes up 39% of income for those with no high school diploma, vs. 33% average nationally. This issue is compounded by the fact that most in the lower education bracket likely are renting and not buying, so they don’t get the tax benefits and equity home owners do.

Unsurprisingly, groups with less education spent less of their household income on entertainment, reading & education, and “other.” With so much of their household income spent on fixed costs, there is little left over for discretionary spending.

This analysis felt particularly poignant today given that Wal-Mart (WMT) just announced second quarter earnings. Results were not great and Wal-Mart cut its earning guidance amid flat sales and a seventh straight quarterly decline in U.S. store traffic.

By the way, I have no idea why the stock isn’t trading down; sometimes the market makes 0 sense to me too.

Wal-Mart’s struggles make sense in light of Retale’s dashboard. Wal-Mart’s core shoppers – those with lower income and less education – are focused on supporting core household expenses, like rent. As a result there’s less to spend on non-necessities at stores like Wal-Mart.

I’m pessimistic about Wal-Mart’s future. Due to the economic discrepancies the dashboard illustrates, I stick by the comment I’ve been making on the blog that retail growth will lie with higher end retailers.

How to set a budget and track your spending (plus a free template!)

There is a great Forbes article coming out in the August 18th issue (on web now) on how millennials are changing money management. Apparently, millennials are more practical and focused on saving thanks to the recession, but want technology to make it easier for them to do so. The article profiled a few companies catering to these needs.

Unsurprisingly, millenials are also interested in being budget conscious.

The first key is to set actually set a rough budget. Two popular guidelines are to spend around 30% of your take-home pay on rent (this will go up if you live in a city like San Francisco or New York) and to follow the 50/30/20 rule. The 50/30/20 rule advocates you spend 50% of your take home pay on “fixed” expenses (rent, cell phone bill, utilities, cable, car payments, groceries), 30% on discretionary spending (shopping, vacations, eating out, basically anything else), and 20% on savings or paying off debts.  With this guideline you’ll also be following Ne-Yo’s fantastic life advice:

“Cause she work like a boss play like a boss
Car and a crib she bouta pay em both off”

The thing is, you can’t just set a budget, assume you roughly follow it, and forget about it. Once you set your budget, tracking your spending regularly is absolutely key to managing and building your wealth.  Knowing exactly what you spend helps in three ways:

  1. It lets you know how much is going out the door each month, for what reason, and whether you need to cut back your spending in any key categories
  2. If you pay on a credit card it keeps track of all your bills and cash spending in one place, so you always know that you’ll have enough to pay what you owe
  3. With all of the cyber security and credit card breaches, it keeps you aware of whether what’s on your credit card was really purchased by you or by an identity thief going on a spending spree

I track all of my spending in an Excel spreadsheet which has formulas to tell me how much I spend in each category, and how much each category takes up as a % of my take home pay. I track my spending by month and update the spreadsheet every week or two.

I lump my spending into the following categories and sub-categories:

  • Home
    • Rent
    • Utilities
    • Cable/internet
  • Car (why I miss New York…)
    • Car payment
    • Gas
    • Insurance
    • Parking
  • Discretionary
    • Cabs
    • Eating Out
    • Groceries
    • Gym
    • Shopping
    • Alcohol (turns out those bar tabs add up, even if you don’t remember them)
    • Beauty (i.e. haircuts, manicures)
    • Misc.

Now comes the fun part, analyzing what you spent over the month. I have formulas built into my spreadsheet that tell me how much each category makes up of my take home pay. If anything gets out of whack I can easily spot where the issue lies.

There are lots of ways you can track your spending, and there are even sites that do it for you like mint.com. I personally prefer to track it manually because I think it is more accurate (Mint doesn’t always pick up the right categories), it makes me think more about what I spend, and it lets me check for a credit card breach or incorrect charge since the items aren’t aggregated together.

I would love to send you a copy of my budget tracker template for FREE. Just shoot me an email at thedaytradette@gmail.com.

Long-term stock I have my eye(wear) on: Luxottica Group

There is something exhilarating about short term trading. I love watching the cents tick up or down over a few hours, deciding at which second to get in or out, and (hopefully) ending the day with a chunk of change. That said, any Warren Buffett disciple will tell you that it’s not the most intelligent strategy for long term wealth growth. So I am trying to focus more of my money on long term value plays while still leaving aside some playing cash for short term trades.

One company I have my eye on for this long term value investment is Luxottica Group (LUX). Luxottica is the world’s biggest eyewear company, which owns brands such as Ray-Ban, Oakley, and Persol and controls retail stores LensCrafters and Sunglass Hut.  The company controls a staggering 80% of the world’s major eyewear brands.

Oh, and you know all those designer sunglasses from Chanel, Prada, and Burberry you shell out hundreds of dollars for? Turns out those are just licensed from the designers and made by this company. (I know, I’m disappointed too.)

What makes the company so brilliant though is its masterful use of vertical integration. Not only does the company manufacture almost every pair of sunglasses you would want to buy, it also owns almost all of the stores you buy them in! So essentially, the entire end-to-end of the glasses market is owned by this one company. And owning the whole market means you have quite the flexibility in what prices and margins you command.

Unsurprisingly, the company’s financials are rock solid. The company reported 2nd quarter earnings in July and sales were up 7% over the prior year. Even more impressive, net income was up 15% for the second quarter and free cash flow was at an all-time high. Their biggest concern is an unfavorable exchange rate (not even a big deal). Their price to equity ratio is at the upper end of retail but reasonable at around 34.

This company’s business model commands a buy on its own. But ideally, you’d like to invest in a company with growth potential on top of its solid present state. Good news is, Luxottica is that type of company. Back in March, Google (GOOG) announced a strategic partnership with Luxottica to create “innovative iconic wearable devices.” In other words, Luxottica will design, develop and distribute new versions of Google’s Web-connected eyewear.

There hasn’t been too much to report since the partnership was announced by my hunch is that recent market developments will spur action between the two in the near future. Designer wearables are now hitting the market, with Tory Burch designing Fitbit covers and Diane von Furstenberg designed Google glasses sold on net-a-porter. And I think the Apple iWatch hype ramping up will force Google to step up its wearables presence.

Luxottica’s current business model, combined with potential market expansion from its Google partnership, make it a solid buy choice for me. I don’t currently own shares but plan to buy in very soon.