Thursday, April 28, 2016

I Love Pandora

By Dave Goodboy

Having trading and investing heroes is both inspiring and motivating.  One of my financial heroes is Peter Lynch of Fidelity Investments.  He is best known for managing the Magellan Fund from 1977 to 1990.  During this time period, the fund returned an astounding average of 29% per year.  This was truly a market-crushing
return during this time frame.

The primary take away I learned from Peter is a very simple concept. In fact, it’s so simple that many investors overlook the true power of the idea.  The idea made popular by Peter Lynch is to invest in what you know.
This means to only invest in companies that you know, like and understand. The theory behind this idea is that if you like a particular brand, service, product and company others will also.  This attracts buyers to the stock thereby pushing the stock price higher. 

Using this idea is what led me to today’s stock pick, Pandora Media (NYSE:P).

I love all types of music from the blues to classical and ambient to heavy metal. Pandora has become my go to source for daily listening.  The streaming music service has incredible depth and breadth of musical choice across all genres.  Not only that, it builds custom listening experiences for the user based on the features inherent in artists and songs the listener plugs into the service.
It is truly amazing technology based on the Music Genome project that breaks music down to its basic DNA core to identify the exact qualities listeners enjoy.
The service boasts approximately 200 million registered users and over 76 million active listeners.
Perhaps the best part for users is that the service is completely free.  Supported by advertising and a modest $3.99 monthly fee for those listeners who want an advertising free listening experience, the company boasts a market cap of $6.11 billion.
The other major metrics include annual revenue at nearly $734 million that has exploded higher in the last quarter by 68.8% year over year.  Gross profit posts at $136 million and total cash on the books comes in at $341.3 million.   YAHOO FINANCE
Other growth factors include advertising revenues ramping up 45% in the last quarter year over year to $141 million and subscription revenues accelerating by 192% over the same time frame to $54 million. 
In addition, the unique metric ad revenue per thousand listener hours RPM increased by 50% year over year to $40.51.

What I like about the future of this company is the fact that it is focusing on local ad revenue by deploying a boots on the ground sales force in 37 markets with a goal of expanding to 239 local markets. This localization of advertisers, in other words targeting listener’s exact local area should work to dramatically increase the company’s bottom line. 

In addition, Pandora is increasingly being integrated into the automobile industry as an in car entertainment choice.  The company
has 5 million auto users currently.  This number can only increase as these new cars go into the aftermarket, exposing another set of drivers to Pandora and the original owners purchase or lease their next new car with the service. 
Perhaps most bullish of all is that Pandora’s management has forecasted revenue of $213 to $218 million in the current quarter.  This reflects a revenue growth rate of over 32%. 

Not to mention the fact that MKM Partners placed a $35 per share near term target and a $115 per share 5 year target on the company. In addition, Canaccord has a buy rating with a $43 target on the stock. 
On the bearish side, the company still has a profit margin of negative 2.69%, negative 7.62 million EBITDA, and diluted EPS of negative $0.11.
In addition, competition such as Spotify, Amazon’s Prime Music, Google’s Play All, iheartradio, and Apple’s iTunes are all hot on the trail that Pandora pioneered. 

I look at this as a possible extremely bullish scenario as one of the monster tech companies in the space may just make an offer than can’t be refused to buy out Pandora.  Speculating a bit, this could create a bidding war easily pushing Pandora’s share price into the stratosphere. 
With that said, the negative metrics should soon be rectified if Pandora remains on the present growth path.  Combine this fact with the potential buy out possibility and it creates a compelling case to go long Pandora.

Saturday, March 12, 2016

A Close Look At Key Anti-Trust Cases

Anti trust economics is built upon a series of legal cases where anti trust law was tested in the courts.  It's important to be familiar with these landmark legal cases when evaluating whether or not anti trust law is actually for the benefit of the consumer. The cases began in 1890 with the passing of the Sherman Antitrust Act.  This post will take a closer look at several of the key anti trust cases in American history.

International Harvester and American Tobacco were critical cases in the early 1900's.  The courts ruled that International Harvester would be allowed to operate as a monopoly since it produces cheap farm equipment crucial for agriculture.  The regulators actually believed that if they would break up the company, there could be a coup d tat attempt on the government! American Tobacco did not share the same fate as International Harvester.  American Tobacco was suspected of price gouging and making phony medical claims about the benefits of tobacco.  Not surprisingly, the regulators went after this company with a vengeance.  The anti trust law brigade broke up the company in 1911.

More modern cases include AT&T and Microsoft.  AT&T was a government supported monopoly for many years.  The government believed that AT&T made the phone industry more efficient.  I remember back when AT&T was the only company offering phone service.  You actually had to rent your handset from the company.  That is how much control they had over telephonic communication in the United States.

AT&T was considered a natural monopoly for many years.  

They owned everything from the phone lines to the very handset in your home.  

I distinctly remember the AT&T logo embossed on every phone in my parent's home.  Under the Reagan administration of the 1980's this all changed.  

Although AT&T was not accused of price fixing directly, just the potential for price fixing was enough to break up the AT&T monopoly.  It seems to  me that it was more due to technological advances than legal action that AT&T lost their monopolistic powers on the American consumer.  

The break up gave birth to dozens of so called baby bells that hammered consumers with offers of lower prices and clear voice service.  I actually switched back to AT&T recently, after years with another carrier to get Apple's newest iPhone.  

AT&T actually had a small time monopoly as the only Apple approved carrier for this revolutionary device.  However, this changed in early 2011 when Verizon starts providing service for iPhones.  The Microsoft case was another story.  

Although it was ruled a monopoly by the courts, it was never actually broken up.  It is still being challenged almost daily by its competitors with anti trust law claims.   

Do Stop Loss Orders Make Sense For Traders?

This article is from my days at Tradingmarkets---- Does it still make sense in today's climbing volatility?

Drop the stops?? You are out of your mind!! I can hear most of you saying this after reading the title.  This article might just surprise you.

Stops are an integral part of most stock trader’s arsenal.  Many consider it foolhardy and na├»ve to trade without a fixed stop in place prior to entering a position.  As with most of the conventional market wisdom, these feelings do not hold up to vigorous testing.  

We have run 100’s of tests have that have proven that fixed stops actually hurt the performance of any trading system.  

One example took all shares trading above their 200 day Simple Moving Average closing at its 10 day low.  

The trade would be exited on a close above its 10 day Simple Moving Average or when a stop is hit at a variety of percentage points below the entry.  Out of nearly 400,000 tested trades, stops hurt the performance of the system.  In fact, the tighter the stop, the worse the performance. 

 Even stops as wide as 50% away from the entry dampened the systems returns.  Of course there are psychological benefits to using fixed stops but at the expense of profit.    Dropping the fixed stops is a sure way to improve the results of your trading system.