Star Analyst Online 明星分析师在线

Actions Semiconductor Is Finally Moving, But Does It Have Legs?

2013-01-16T11:18:00.000-08:00

After being dormant for a long time, Actions Semiconductor Co. Ltd.'s (ACTS) stock finally began moving on January 8, 2013. Since then, the stock has had a pretty good run. So as an investor, I am asking: now what? Does this upward movement have legs or will it fade away just like past flash bursts?

Financially, the company did turn its bottom line from red to green in the last quarter, but that result is nothing close to splendid as the third quarter is traditionally the company's strongest. In fact, Q3 2012 was a rare occasion when the management team did not actually meet its revenue target. Table 1 shows the company's revenue, gross profit, and net income for the past 10 reported quarters.

Read my full article on Seeking Alpha.

Is it finally time to short U.S. Treasury Bonds

2013-01-11T11:14:00.000-08:00

I wrote an article last February expressing my bearish view on U.S. treasury bonds when the 10-year Treasury yield was at about 1.9%. I did not actually bet against treasury bonds at that time because, technically speaking, the upward momentum for treasury bonds was still very strong. As for NFLX, my major shorting bet in 2011, shorting against a stock/bond close to the top of the hype is a tricky and dangerous maneuver because it is hard to know where the exact long-term top of the stock/bond is and when the stock/bond will reach that top. In addition, the situation in Europe was still very dire at that time, which could have provided additional support for treasury bonds. My concern turned out to be real, and the 10-year Treasury yield continued to slide to an all-time low of just below 1.4% and has climbed steadily since. It has now gone a full cycle back to about 1.9%.

See my full article on Seeking Alpha.

Taiyuan in Shanxi hikes natural gas price for the first time in 5 years

2012-08-28T07:00:00.000-07:00

On 8/24/2012, Taiyuan in Shanxi hiked residential natural gas price for the first time in 5 years. The increase of 7.6% was very large compared to similar adjustments in gasoline and diesel prices. Read the full news here: http://news.szenergy.biz/news_10546.html

This last development has the following positive implications on Longwei Petroleum (LPH):

This indicates that demand for fuel energies is strong in Shanxi province, particularly in Taiyuan metropolitan. It also indicates that growth in supply is probably limited and cannot satisfy growth in demand.
It means that economy in Taiyuan area is doing very well and consumers are not slowing down in consuming more energy. Note that Shanxi’s yearly GDP growth rate has been higher than national average by significant extent for the past 15 years.
Because natural gas is a competition to gasoline and diesel (i.e. gasoline/diesel and natural gas are alternative goods for many people), under economic principal higher natural gas price will decrease sales volume of natural gas and increase sales volume of gasoline and diesel in the area.

In conclusion, with this last development, the outlook for Longwei’s revenue growth is brightened further in my opinion.

Disclaimer

My ratings and/or analyses of a stock only represent my personal view on the stock and/or my assessment on the probable movement of the stock price in the next 12 months. They are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely for buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.

Profit From Treasury Bonds And Oil Producers In This Election Cycle

2012-08-23T06:30:00.000-07:00

One of this autumn’s biggest news headlines will be the result of the U.S. presidential election, as it will have a profound impact on that nation and the world because the two candidates and their respective political parties have totally different philosophies about how to run the U.S. economy and many other important issues.

Read my full article on Seeking Alpha.

Disclaimer

I am a completely independent analyst and am not paid by any company of which the stock I cover or write articles about. However, I may have long or short position on a stock I cover or write about at any time.

My ratings and/or analyses of a stock only represent my personal view on the stock and/or my assessment on the probable movement of the stock price in the next 12 months. They are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely for buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.

Seeking Alpha in Chinese Company's Privatization Spree

2012-08-16T07:17:00.000-07:00

On August 14, 2012, an article on Yahoo Finance discussed recent privatization deals by Focus Media (FMCN) and Fushi Copperweld (FSIN). I found the information intriguing and thought-provoking. As a mid-cap company, Focus Media probably has better access to large capital infusion and could therefore strike such a big privatization deal. Nonetheless, the offer price of more than 20 times its trailing EPS is still quite amazing. For Fushi Copperweld, the buyout price is not cheap either at more than 13 times trailing EPS. That’s why Fushi’s buyout offer was only about 45% over its stock price before the announcement. For a smaller company trading at less than three times training EPS, a reasonable buyout can easily be more than 100% of its stock price before the announcement.

Read full article on Seeking Alpha.

Disclaimer

I am a completely independent analyst and am not paid by any company of which the stock I cover or write articles about. However, I may have long or short position on a stock I cover or write about at any time.

My ratings and/or analyses of a stock only represent my personal view on the stock and/or my assessment on the probable movement of the stock price in the next 12 months. They are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely for buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.

ETrade's Last Move Hinted Consolidation for Online Brokerage Industry

2012-08-12T07:18:00.002-07:00

E-Trade (ETFC) announced today that its Board of Directors has fired CEO Steven J. Freiberg and is searching for his replacement. In the news release, the company said that the move was to “transition the role of CEO to a new leader to guide the Company through the next phase of its evolution.” That sounds exciting, but exactly what drastic changes can or should the company make to increase shareholders’ value?

Read my full article on Seeking Alpha.

Disclaimer

I am a completely independent analyst and am not paid by any company of which the stock I cover or write articles about. However, I may have long or short position on a stock I cover or write about at any time.

My ratings and/or analyses of a stock only represent my personal view on the stock and/or my assessment on the probable movement of the stock price in the next 12 months. They are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely for buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed

The Lesson Learned From Actions Semiconductor's Q2 2012 Results

2012-08-09T06:55:00.000-07:00

Actions Semiconductor Co. Ltd. (ACTS), reported its second quarter 2012 results on August 7, 2012. The results were close to my estimates in my previous article about the stock.

Read full article on Seeking Alpha.

Actions and Ritu Announced MP4 + GPS Solution for Mobile Devices

2012-06-19T18:30:00.000-07:00

Unlike many Chinese small caps, the last stock I initiated coverage, Action Semiconductor, is household brand name and well known company in China. There are wealthy dose of articles in China every month about the company’s products (or consumer electronics using the company’s products), technologies, major events (e.g. the grand opening of their new Headquarter in April), or simply a review or analysis of the company itself. The management team is very low key, kind of the total opposite of the management team of Apple or Amazon. Thus, they rarely actively showcase positive developments to their investors in the U.S.

Last night, I found another news piece for ACTS written in Chinese that is quite interesting and very bullish development for the company in my opinion. For whatever reason, the company decides not to put out formal news release in the U.S. for this significant development. I am just going to post the news here on my personal blog to share with my closest followers and people who are the most interested in the stock (in other words I don’t want to spook the management team’s intention of keeping this under the radar for now).

Without further due, here is the big deal: Actions and the 2^nd biggest Chinese electronic map provider Ritu (http://ritu.cn/index.aspx) announced a joint-developed solution that put GPS function in all MP4 devices (which pretty much means all portable devices with mid to high end multi-media function)! This news was reported by two of the biggest electronic news sites in China:

http://www.eeworld.com.cn/qrs/2012/0613/article_10553.html (6/13)

http://gps.yesky.com/378/32258878.shtml (6/14)

I see this as a win-win situation because both companies can benefit greatly by integrating its own product with the other company’s products. I think it is likely that most portable devices that use Ritu GPS map will use Actions’ chipset too. According to this report - http://tech.qianlong.com/33443/2012/06/19/4682@8051747.htm – in 2011 there were 6.86 million units of portable GPS devices sold in China, a YOY growth of 31% from 2010. I call this “traditional portable GPS market” because these devices provide mostly GPS function but very limited multi-media functions. Because this market is only at its infant stage, annual growth rate in the next several years likely will be even higher. Assuming that it grows 40% this year, there will be 9.6 million units sold, of which about 1.05 million units will belongs to Ritu.

Now, that is only for the traditional GPS market. New portable MP4 devices that adopt Ritu and Actions’ solution can easily dwarf that number as the units of MP4 sold in China every year is probably in hundreds of millions.

Disclaimer

How Apple's Turnaround and Payback to Shareholders Relate To Actions Semiconductor

2012-05-15T07:00:00.000-07:00

One stock that is the topic of much discussion is Apple Inc. (AAPL). The story of Apple’s turnaround and how it rose from ashes in 2002 was one of the most-talked about stories in the past 10 years, and the story of Apple’s decision to finally start paying a shareholder dividend is among the most talked-about stories this year.

Seeing the way revenue at Actions Semiconductor Co. Ltd. (ACTS) is growing again, and with the increasing likelihood of additional share buybacks, I feel a déjà vu between what’s happening at Actions Semiconductor and Apple’s turnaround and dividend stories.

Read my full article on SeekingAlpha.

Disclaimer

A Safe And Lucrative Value Arbitration On Cutting-Edge Technologies

2012-05-04T07:00:00.000-07:00

Stock Analyzed: Actions Semiconductor Co., Ltd. (ACTS)

Current Stock Price (as of May 2, 2012): $1.70

Arbitration Fair Value Assessment: $4.00 or higher

As mainly a value investor, I pay a lot of attention to companies with a strong business model that are below their current book value, such as E*TRADE Financial (ETFC). I also pay a lot of attention to stories of companies with valuable cutting-edge technologies that have seen their stocks depressed to multi-year lows because many companies in this situation are good acquisition targets or high-stake investments by other companies. The latest story of Microsoft’s (MSFT) $300 million investment in Barnes & Noble (BKS) is a perfect example.

Because of the big drop in share prices over the past two years, many Chinese small- and mid-caps fit both criteria and have seen their stock prices more than double this year when the market suddenly recognized the disparity between their stock prices and their intrinsic values. Dangdang (DANG), SmartHeat (HEAT), Recon Technology (RCON), Guanwei Recycling (GPRC), and Xinyuan Real Estate (XIN) are some good examples.

One company, Action Semiconductor (ACTS), boasts industry-leading, cutting-edge technologies, a top-notch management team, and the safest assets on its balance sheet, but it is still totally overlooked by the market and sitting at probably the lowest ratio of market capital to book value I have ever seen.

Read full article on SeekingAlpha.

Disclaimer

Market Has Overreacted To The Resignation Of Dangdang's CFO

2012-04-25T06:44:00.000-07:00

After I published my first article on e-commerce featuring China Dangdang Inc. (DANG) on January 17, 2012, the company’s stock soared for three months—appreciating almost 90% from about $6.00 on January 17, 2012 to $11.25 on April 10, 2012. Then, all of a sudden the announcement of the CFO’s resignation hit the wires on April 16, 2012, and the stock fell over a cliff and lost 20% of its value in a week. Discussion boards right now are full of fear, panic, and rumors.

Read my full article on SeekingAlpha.

Disclaimer

I am a completely independent analyst and am not paid by any company of which the stock I cover or write articles about. However, I may have long or short position on a stock I cover or write about at any time.

My ratings and/or analyses of a stock only represent my personal view on the stock and/or my assessment on the probable movement of the stock price in the next 12 months. They are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely for buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.

Time Again For Value Investing Through Berkshire Hathaway

2012-04-11T07:00:00.007-07:00

As a value-driven and at times contrarian oriented analyst and investor, I have the upmost respect to Warren Buffett and Berkshire Hathaway (BRK.A, BRK.B). The company has offered investors one of the highest and consistent returns for countless years. After a temporary drop in ROE and ROA last year, I sense that the company’s net profit is growing again this year. Thus, it may be a good time for a value investor like me to take a hard look on the stock again. Some catalysts that I think will contribute to the growth of the company’s revenue, net profit and stock price over the next several quarters are as follows:

Read my full article on SeekingAlpha.

Disclaimer

I am a completely independent analyst and am not paid by any company I cover or write articles about. However, I may have long or short position in a stock I cover or write about at any time.

My ratings and/or analyses of a stock represent only my personal view of the stock and/or my assessment on the probable movement of the stock price in the next 12 months. My ratings are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely when buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences, and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.

E-Trade Financial: Trade Or No Trade?

2012-04-05T18:41:00.000-07:00

Last October, I wrote an Instablog article about E-Trade (ETFC). Six months have passed, and the stock has advanced more than 15% since then. I feel that now is time to review the trends of company’s several key performance indicators over the past 6 months and predict how they may shape up for the remaining of the year.

Read my full article on SeekingAlpha.

Disclaimer:

I am a completely independent analyst and am not paid by any company I cover or write articles about. However, I may have long or short position in a stock I cover or write about at any time.

Investing In Treasury Bonds: A Guaranteed Losing Strategy?

2012-02-26T15:23:00.002-08:00

Stock markets all over the world have had great runs so far in 2012. In contrast, U.S. Treasury bonds have lagged significantly behind and are pretty much stuck in mud for the past three months. In my view, the reason is pretty simple: There are two forceful forces countering each other in this tug of war for Treasury bonds.

Read my full article on SeekingAlpha.

Disclaimer:

I am a completely independent analyst and am not paid by any company I cover or write articles about. However, I may have long or short position in a stock I cover or write about at any time.

Dangdang Q4 Earning Review - Higher Growth And Lower Margins By Choice

2012-02-24T07:00:00.003-08:00

Stock Covered: E-Commerce China Dangdang Inc. (DANG)

Current Stock Price: $6.32

Target Stock Price: $12.00

Rating: Strong Buy

Date of Analysis: 2/24/2012

E-Commerce China Dangdang Inc. (DANG) announces fourth quarter and fiscal year 2011 Results on February 23, 2010 and hosted a conference call with investors and analysts on the same day.

Read my full article on SeekingAlpha.

Disclaimer

I am a completely independent analyst and am not paid by any company I cover or write articles about. However, I may have long or short position in a stock I cover or write about at any time.

Next Amazon or Next Apple?

2012-01-27T07:00:00.000-08:00

Sneak Peek: Dangdang is said to be "10 years ago Amazon in China", but many charateristics of the company and its CEO suggest that it might be more close to "10 years ago Apple in China".

Read my full article on SeekingAlpha: http://seekingalpha.com/article/322667-dangdang-next-amazon-or-next-apple.

Disclaimer

I am a completely independent analyst and am not paid by any company I cover or write articles about. However, I may have long or short position in a stock I cover or write about at any time.

E-Commerce China Dangdang Inc. (DANG) - Coverage Initiation

2012-01-17T07:00:00.000-08:00

Stock Covered: E-Commerce China Dangdang Inc. (DANG)

Current Stock Price: $5.93

Target Stock Price: $15.00

Rating: Strong Buy

Date of Analysis: 1/17/2012

Most of my readers know that I have a strong preference for value stocks with unduly depressed low valuations over growth stocks. If I am to invest in a stock that has a high trailing P/E ratio, the stock needs to pass a series of especially strict tests. These tests involve all aspects of the management team, business, and industry and must all be passed to convince me that the stock is cheap from the perspective of its future revenue and profit and have strong potential to deliver a home - run return for new investors of that stock today. One stock that convinced me is E-Commerce China Dangdang Inc. (DANG).

See my full article on SeekingAlpha.

Disclaimer

I am a completely independent analyst and am not paid by any company I cover or write articles about. However, I may have long or short position in a stock I cover or write about at any time.

ETRADE Financial Corporation (ETFC) - Rating Initiation

2011-10-17T22:53:00.001-07:00

Stock Covered: E*TRADE Financial Corporation (ETFC)

Current Stock Price: $9.31

Target Stock Price: $18.00

Rating: Strong Buy

Date of Analysis: 10/17/2011

Most people know the company well, at least on the surface level, because it is arguably the most recognized online broker in the U.S. or probably in the world. More information about the company are readily available at many places on line including Yahoo Finance: http://finance.yahoo.com/q/pr?s=ETFC+Profile.

Like saying EBay and Amazon started online bidding and merchandizing, saying that the concept of online trading or individual investors was created and popularized by E-trade is not an over-statement. As with all hot dot com stocks dominant in their respective businesses, the stock price was pushed to north of 500 in year 1999 (on today’s split-adjusted basis), more than 150 times book value of equity, while the company was operating at a loss, and was still traded at more than 200 (again today’s split-adjusted basis) as recently as summer 2007, close to 20 times book value of equity, when the company was losing more than $1 billion a year. At those times, buying Etrade stock was like buying Amazon today or Netflix earlier this year, a game of chasing after a hot run-away e-commerce stock and competing with countless eager buyers to hope for getting a share now before it going up several notches higher next month.

However, starting at late summer in 2007 when real-estate and sub-prime bubble burst, the stock fell from heaven to hell in a blink of eyes, and the quarterly losses from sub-prime investments that the company made snowballed into daunting amounts in 2008. Since then, like other major financial institutions the board and management team have worked diligently to increase the quality of loans on its book and decrease loss on re-valuation of the bad fixed income investments each quarter. Nevertheless, during this painful period of time tons of investors have lost interest in the stock and fled. Fast forward to today, the stock is trading at single digit, only about 10 times of forward P/E, and just over 50% book value of equity, a stark contrast to the sky-high valuations in its golden years. It is exactly this dirt-cheap level of valuation that attracts attentions of many value-oriented investors like me. I have been monitoring the stock for years but just initiated my first position lately because I believe that while the drop from 200 in year 2007 to 20 in year 2008 was understandable and maybe even somewhat justified, the last leg of drop from 16 to sub 10 this summer was way overdone and that current overly-depressed level is not sustainable for the stock.

To begin with, let’s take a look at the company’s pro-forma earnings and book values. First of all, the sour point of the income statement over the past three years – loss from write-offs on mortgage investments (Provision for Loan Losses) – has improved dramatically over the past year or so, diminishing from over $300 million a quarter in 2008 to only about $100 million last quarter. Going forward, I estimate that the loss will keep on decreasing each quarter because the housing and mortgage market has basically bottomed last year and have stabilized this year. After more than three years, a big chunk of troubled mortgages in the U.S. have been dealt with – i.e. refinanced or “forgiven” under federal programs. The management team of Etrade, like those of other well-managed financial institutions, has been working especially hard to sell as many of these bad assets as quickly as possible. Since there is no sign that rate of new delinquencies (not those that are already in the pipe line) in the U.S. will reverse the down-trend, at least not any time soon, naturally the amount of provision for loan losses should keep on decreasing in the future. On the other hand, because mortgage rates have dropped a huge extent over the past three months under European debt turmoil and Fed’s manipulation, the market values of most of Etrade’s mortgage loan assets have probably increased materially. Thus, it is likely that the company will report higher amount of gain on sale of its mortgage investments this quarter and next few quarters, assuming the company take advantage to sell more lower-quality mortgage investments. This is not just a concept or my own wishful thinking, it is a mathematical conclusion backed up by the big capital gain on sale of assets and declining charges on bad loans seen in the last quarterly report from BOA and many other banks:

http://www.bizjournals.com/buffalo/news/2011/10/18/bank-of-america-swings-to-3q-profit.html?ana=yfcpc

In other words, the market has been not only wrongfully associate Etrade with the financial institutions that have substantial amount of investments in European debts and have completely misjudged the effect of European turmoil on Etrade’s loan assets by over-estimating the negative effects, if any, and ignoring the positive effects. Note that I am by no means a bull on overall U.S. economy or housing market. I have said repetitively that U.S. economy and real estate market will remain sluggish probably for at least a couple more years. However, mortgage lending does not equate to the entire economy or even to the real estate sales market. Mortgage is historically a very safe business for lenders because it is backed by hard valuable assets that people have real needs for them and that keep on appreciating year over year. Provided that a lender have enough save cushion – enough equity from borrowers – and do adequate credit/payment capability verification on borrowers, the odds of loans going into default and are not able to recoup at least the debt portion during sale are small and very manageable. This is exactly what the situation for most existing mortgages circulating and new mortgages being written today. What we experienced in 2007 was more an exception than a norm. For mortgage lenders to experience increased loan loss again average national prices of condos and single homes probably need to drop 15%+ further from current level, which was already a 30% -50% pull back from the high in early 2007. I just don’t see much chance of that happening within this decade. So, although mortgage lending might not return to the status of exciting and lucrative business in the near future it should be at least an OK business going forward. On that note, I predict that the quarterly loss we see from the Balance Sheet Management segment on Etrade’s income statement should largely go away and possibly start going above break-even in Q3 or Q4, adding to the profit from Trading and Investing segment.

Now, let’s turn our attention to the strong side of Etrade income statement – the trading and investing segment. Unlike the mortgage lending segment, this business has been remaining strong and kept on growing over the past few years. It actually reaps big benefits from recent market gyrations because trading volume shot over sky in the third quarter:

http://www.zacks.com/stock/news/59324/E*TRADE's+July+DARTs+Surge

http://finance.yahoo.com/news/ETRADEs-August-DARTs-zacks-4076248051.html?x=0&.v=1

http://finance.yahoo.com/news/Chuck-Talks-to-fool-2771235286.html?x=0&.v=2

As long as stock market remains turbulent in the next several months, a scenario most economists and analysts think will play out, daily DARTs and trading commissions and fees will remain high for online brokers like ETrade. Schwab’s quarterly report clearly demonstrates this. Another factor also in Etrade’s favor is the shift of investors’ personal assets from managed accounts to online brokerage account due to the growing distrust many investors have on mutual funds after seeing big loss on many fund managers charging high fees and decision to “take things into their own hands” by doing investing and trading by themselves. The asset and new account growth in Schwab’s last quarterly report also demonstrate this. I believe, however, that both factors will benefit Etrade more than Schwab because in my opinion Etrade has the highest percentage of clients characterized by young ages, nimble, love doing things online, and is not afraid or hesitant to do more investing and trades when the market is unstable. That’s why ETrade CEO expressed high confidence on the company’s ability to attracts new customers and increase portion of customers’ assets under management in the next several quarters.

The only negative current environment has on Etrade brokerage business is lower margin interest resulted from lower treasury rates. However this negative effect is very small because (1) interest rates were already low by historical standard to begin with before the last leg of drop in the summer, and (2) most rates adjustments (drops) were on long term 10-year+ rates, not short-term 3-month to one-year rates. Theoretically, both long-term and short-term rates might affect borrowing costs on any kinds of loans, including brokerage margins. However, practically brokerage margin interest rates are mostly tied to short-term rates because they are by natural variable and floating kind of loan, not long-term fixed interest loans like mortgage. Most online traders don’t have any problem paying as high margin interest rate today as three months ago because they understand that if they want to borrow to gamble, the cost will not be cheap. Again this concept was proven in Schwab’s last quarterly report showing average interest income rate only dropped marginally from 1.89% a year ago to 1.82% last quarter. The drop on margin rates should be even smaller for pure online brokers like Etrade again because of the high percentage of its clientele in free spirited, high-risk/high return minded individuals. From what I have seen, the margin rates Etrade charge has almost stayed constant over as long as I can remember:

https://us.etrade.com/e/t/estation/pricing?id=1206010000#MR

Note that they deliberately tie the margin rates to a vague “base rate” without explaining clearly what this base rate refers to. Empirically from my observation the base rate ties mostly to three month to one-year rate rather than 10-year, 20-year, or 30-year long-term rates.

All in all, I expect the company to have much less loss on provision for loan loss, much higher gain on loans and securities this quarter, roughly the same net interest income from Trading and Investing segment, marginally less net interest income from Balance Sheet Management segment, and a huge increase (30%+) on commissions, fees and charges, and principal transactions from Trading and Investing segment. In conclusion, I think the company will likely deliver 19 to 21 cents per share for Q3, beating current street census of 18 cents per share by at least a couple cents. Going forward, I estimate that quarterly income probably will come in at around 20 cents and maybe some changes in the next couple quarters and increase to around 25 – 27 cents by next summer. That’s a forward 12-month EPS of 90 cents to one dollar. That means the stock is currently trading at forward and mid-term normalized P/E of 10.3 to 11, way too low for a company with valuable brand name and very strong competitive stance growing at no less than 20% annually for at least the next five years. A more justifiable and average forward P/E for an e-commerce powerhouse of this kind is around 20, implying a fair current stock price of about $18 - $20 per share.

In addition to earnings, the company will also likely to accelerate selling undesired mortgage assets above their current book value, realizing more gains on sales, using portions of the cash proceeds to decrease its liabilities and deleverage the balance sheet a little bit, and increasing its cash pile with the remaining proceeds from sales of assets and net earnings. What will the company do with those excessive cash? I think for a management team that seem to care about defending its shares and increasing shareholders’ values, they probably will return some cash to investors in form of dividends or more likely share-buybacks. Aside from low P/E ratio, current stock price is also significantly below book value of equity per share and only about tangible book value per share, making an investment in its own stock a very safe choice of increasing value for shareholders for the mid to long term. From the perspective of market capital to book value, AMTD is trading at 2.4x book value and 13.5x tangible book value, while Schwab is trading at 2.2x book value and 2.42x tangible book value. On that note, it is fair for Etrade to trade at minimum 1.5 times book value or 2 times tangible book value to avoid arbitration opportunity. Coming from this route, one can reach a conclusion that the stock should be trading at $19 - $20 minimum.

Speaking of arbitration, it may sounds cliché by now but I hear a loud and approaching sound of “buyout” from the stock now. Some of you might have heard several reputed public figures shouting Etrade being sold to one of its two major competitors – TDAmeritrade and Schwab. Here are some articles on that:

http://blogs.barrons.com/focusonfunds/2011/09/20/hedgie-ken-griffin-still-hoping-goldman-will-recommend-e-trade-look-for-buyer/?mod=yahoobarrons

http://www.cnbc.com/id/44803087?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo

http://www.thestreet.com/_yahoo/story/11280912/1/value-guru-doubles-down-on-the-us-with-gm.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

It is amazing to me the game of baiting and talking down price of their target TDAmeritrade and Schwab have been playing so far on acquiring Etrade. If they are having the unproductive zero-sum game thinking of “if somebody is trying to sell me something and the sale benefits others, it must be a bad deal to me” and “if you win, I lose; if I have to win, you have to lose” in their minds. On the other hand, they should flick their business textbook and refresh themselves the concept of “win-win” that gives superior competitive advantages to the economy and business of the U.S. over the rest of the world for decades. When a valuable and still one of the most dominating competing brand recognized by almost every American and which they just cannot easily beat and take away market shares from any time soon trading at the lowest point in the company’s history ever and 50% below book value, if the board or CEO of TDAmeritrade and Schwab are naïve enough to even doubt if buying out Etrade at below $20 can deliver positive return to their shareholders, I suggest that their investors quickly find a way to replace these incapable minds with others that have better know-how on how to increase enterprise value and guts to be determined to push through major positive initiative such as buying out a major competitor at a reasonable price, even it seems like a somewhat bold endeavor at a moment. The synergy that TDAmeritrade and Schwab can realize from folding Etrade under their arms is so huge that if I am a consultant to any of two I’ll pound on the table and tell the board without any reservation that buying Etrade under $20 right now is the major investment that is most guaranteed to deliver positive return for the company. For TDAmeritrade and Schwab to pass the opportunity to buy Etrade now is like having AT&T or Verizon passing an opportunity to buy T-mobile for less than 20 billion, less than half of the “fair price” that AT&T proposed to pay. They should be thankful to this rare opportunity, in which the management team of a valuable acquisition target is willing to openly consider buyout offer, presented to them by the unusual economic turmoil and unique situation within the acquisition target.

Of course, rather than simply refusing to consider any big-scale takeover or failing to recognize the enormous value of the acquisition, the management teams of TDAmeritrade and Schwab may actually eager to take over Etrade, even if they have been trying hard to conceal their intention to the public, but just be greedy and decided to take advantage of current market slump to try to pay less for the acquisition. If they indeed have been trying to do so, they have succeeded to some extent. Rather than giving a first offer price of $18 when Etrade was trading at around $15 and probably eventually paying $22 - $25 to win the bidding war, now the two suitors can possibly give $15 for the first offer and close the deal between $18 - $20, a saving of 20% or more. Now, if I am the decision maker in any of them I’d pull the trigger right now because the risk of keep on playing the wait and see game has mounted to a point that outweighs potential residual benefits. Not only do I risk losing the first-mover advantage to my main competitor, but I also risk inviting more competitions to the acquisition when the acquisition target has been sitting under spotlight for too far and attracts attention from companies that did not pay attention at the first place. Beside these two suitors, many big commercial and retail banks such as JP Morgan, BOA, Citi, Wells Fargo, SunTrust, etc. might see great value in Etrade because most of these traditional banks have been trying to catch up in this online brokerage business (like Microsoft is trying to catch up on cloud computing, searching, or mobile phone business) and have a tough time persuading their clients to use the trading platforms they have developed in-house. Why? Because the trading platforms developed by these brick-and-mortar banks are just down-right lousy. The FAs in BOA and JP Morgan keep on trying to lure me into moving some money to their brokerage account and using their brokerage service, but every time I read their human-directed, telephone, or online trading systems and procedures, I lost the last interest in using them pretty quick. Think about this: how much more revenue BOA or JP Morgan can enjoy if they link Etrade to their existing online banking services and persuade just 20% of their pure banking customers to start trading on Etrade?

The list of potential suitors doesn’t just stop here. Many e-commerce heavy weights that have a track record and good appetite of expanding into new online segments may be very interested in Etrade too. Just to name a few: Google, Amazon, Ebay, Microsoft (for MSN network), and Yahoo (granted, the company itself might be bought soon). Even financial software makers such as Microsoft (Money) and Intuit might want a bite of Etrade too. If any bigger competitor jump into the bidding war, the price that TDAmeritrade or Schwab has to pay to win the game will be much higher, and they risk losing this valuable assets to a much bigger, more formidable new direct competitor, a result that make the BOD and management teams of the two companies regret for years.

My last word: for such a widely recognized and still dominant brand name like Etrade trading at such a dirt cheap price that is still a technology leader in its business and final choice for many people who begin trading online, receiving a buyout offer within a fair short period of time is not just a wishful thinking, a dream, a talk, a hypothesis, or even a plan. It is a natural, logical development that should and more likely than not will unfold. Abundant of similarly depressed well-known companies in their respective businesses have show the way lately:

http://finance.yahoo.com/q?s=bbnd&ql=1

http://finance.yahoo.com/q?s=ep&ql=1

http://finance.yahoo.com/q?s=snda&ql=1

My advice to TDAmeritrade, Schwab, or any company who see any synergy and value in ETrade: do not wait. Contact Goldman Sachs and Etrade BOD as soon as possible to gain advantages on insider insights, good relationship to the board and management team, and any preliminary exclusive “rights” in bidding that you might be able to negotiate with the board and secure before others join the game. Don’t let your competitors run 10 meters first and then try to catch up in a 100-meter race.

Disclaimer

I am a completely independent analyst and am not paid by any company of which the stock I cover or write articles about. However, I may have long or short position on a stock I cover or write about at any time.

My ratings and/or analyses of a stock only represent my personal view on the stock and/or my assessment on the probable movement of the stock price in the next 12 months. They are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely for buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.

Netflix, Inc. (NFLX) - Rating Update

2011-10-17T16:55:00.001-07:00

Stock Rated: Netflix, Inc. (NFLX)

Current Stock Price: $117.33

Target Stock Price: N/A

Rating: Neutral / No Opinion

Date of Analysis: 10/17/2011

Netflix has been fallen from $272 to $117, a drop of 57% in just two and half months since my initiation of a strong sell rating on 7/27. Many negative developments I pointed out in my article have played out, and the market has awakened to the seriously over-priced valuation level of the stock above $200.

At current juncture, there certainly are more downside potentials for the stock over the next 12 months should the company not do something quick to stop subscriber loss and contain cost increase on both digital and physical movie delivery fronts. Nonetheless, after such a huge drop in such a short period, it is equally possible for the stock to stage a bounce back or swing side ways for a considerably long period. I think for intermediately term (3 to 12 months), upside and downside forces are roughly balanced. As such, I formally changed my rating on my stock to Neutral / No Opinion and stop my price target for the stock until stronger fundamental evidences and/or technical indicators mounted onto the long or short side.

Disclaimer

I am a completely independent analyst and am not paid by any company of which the stock I cover or write articles about. However, I may have long or short position on a stock I cover or write about at any time.

My ratings and/or analyses of a stock only represent my personal view on the stock and/or my assessment on the probable movement of the stock price in the next 12 months. They are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely for buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.

Change to Approach on Writings of Stocks

2011-10-17T16:41:00.001-07:00

Dear Readers,
First of all, thanks again to all supports and interests many of you have given to my sites and analyses.
As I tested writing analytical pieces on stocks on this site for many months since the beginning of this year, I have come to realize that I do not have enough time to devote to writing long and comprehensive articles detailing all facets of the stocks I select to analyze. Please remember that I am not paid by any of the companies that I write articles about, and although I from time to time may have long or short positions on the stocks I analyze, I don’t “bet my house” on any of them as some investors do. It is because of so I believe I can close to be truly unbiased on my analysis and views toward the stocks I pick.
Because of constraint on personal time and resource, I would switch my approach of analyzing stocks from “full coverages” to “ratings”. In short, my articles will be much shorter and speaks directly to the key points that I think why a stock is under/over valued and where its fair value should resides.

Last but not the least, I may choose to lengthen the interval of my articles on a stock in a period in which I don’t see enough new information to change my view, rating, and fair value assessment of a stock. In that spirit, for those of you who are wondering, I have not changed my views toward LPH and BRK. From all available data points, it still looks to me that BRK is roughly fairly valued for now (although Mr. Buffett might not agree with me judging by his recent stock repurchase), while LPH is still materially undervalued by the market in my view.

Kevin Chen

Netflix, Inc. (NFLX) - Potential Red Flags in Financial Statements and Business Risks

2011-07-29T08:00:00.000-07:00

Since I initiated coverage of NFLX, several investors have given me good feedbacks and inputs (most of them are positive to my analysis, and I appreciate it). Some investors mentioned some red flags in the company’s financial statements that I think are worth some discussions here. There are indeed numbers in their financial statements that may be indications of poor earning quality and/or manipulation on recording of accounting transactions and/or preparation of financial statements by the company in order to hide the deterioration of operational results/outlook from the attention of the public. All my analysis and estimates of course were based on an assumption that reported accounting statements so far are reliable and certain areas that require management’s assessments such as depreciation schedule, intangible impairments, timing of revenue recognition were prepared in an objective and unbiased way. If not, all analysts’ estimates of future financial results may be totally off.

One area of potential concern is the amortization amount that you mentioned. The radio of “Amortization of content library” to “Current content library” stayed at 62% - 63% in the first two quarters. So, the numbers were consistent in Q1 and Q2 reports. However, what many analysts have overlooked (or have noticed but not brought to investors’ attention) is that the value of current content library swelled 47% in Q1 and 88% in Q2 this year, and there is no stop of the bloating trend in sight. Meanwhile, revenue only increased by 9.7% from Q1 to Q2. So, going forward the company’s gross margin is going to be squeezed hard in the remaining of the year and beyond. As we know average per capita income and purchasing power in Latin America is a fraction of that in the U.S., but I don’t think movie studios will give Netflix, or any streaming provider, large discount on per subscriber or video view charge. So, I really doubt if the company can even break-even in their south America venture. For U.S. and Europe, tons of people are still unemployed and struggling to pay their debts, while inflation rates are high for commodities and staples but low for discretionary items (well, it is economy 101 – many people’s pockets are shrinking, and most people choose to cut vitamins fist before cutting life-saving medicines). So, overall I am just not feeling too good about the outlook of the company revenue growth and am very pessimistic about its margin.

Another area of particular concern from the standpoint of trustworthiness of the accounting reports is accounts payable. This line bloated by 35% in Q1 and 77% in Q2. The increase so far seems to be still in line with the increase in purchase of content library each quarter. However, the radio of AP to cash + short term investments has grown from 0.63 on 12/31/2010 to 1.42 on 6/30/2011. In other words, the company’s quick ratio has deteriorated significantly from AA to BB- in credit rating terms in my opinion. If some suppliers decide to tighten the invoice term to the company for whatever reason such as seeing better term from the company’s major competitors, the company can quickly run into liquidity trouble. What is even more alarming and suspicious to me is that the company suddenly erased the showing of change in accounts payable in its last quarterly report. In the statements of cash flows for Q1 (http://secfilings.nasdaq.com/filingFrameset.asp?FileName=0001193125%2D11%2D112061%2Etxt&FilePath=%5C2011%5C04%5C27%5C&CoName=NETFLIX+INC&FormType=10%2DQ&RcvdDate=4%2F27%2F2011&pdf=) this year and earlier periods, “Accounts Payable” is clearly shown as a line item under “Changes in operating assets and liabilities” in cash flows from operating activities section. However, in the statements of cash flows for Q2, (http://secfilings.nasdaq.com/filingFrameset.asp?FileName=0001193125%2D11%2D198669%2Etxt&FilePath=%5C2011%5C07%5C27%5C&CoName=NETFLIX+INC&FormType=10%2DQ&RcvdDate=7%2F27%2F2011&pdf=), the line for accounts payable was gone, evaporated! Of course the liability account does not stay flat QOQ. In fact it increased by a whopping $311K from $222.8K to $533.4K within the last quarter. I think its accounting team probably buried the change in AP into “Additions to streaming content library” line or “Change in streaming content liabilities” line. Either way, it is a very misleading way of presenting operating cash flows because AP has very different meaning from these other two accounts. AP is part of liability, which tells a company’s extension of borrowing capacity to its vendors and the danger of running into insolvency in the future. On the other hand, “Additions to streaming content library” and “Change in streaming content liabilities” are cost of revenues account that show how much new inventory was purchased and how much inventory was consumed or written down. The fact that the company decreased visibility of change in AP in its financial statement (sure people with enough accounting knowledge will still figure it out by doing the calculation I showed, but many investors have limited accounting knowledge or simply do not pay attention to the QOQ changes in balance sheet lines) tells me clearly that the management team themselves agree that the huge increase of AP was a negative to many investors.

There are a lot of other legitimate questions to ask for data to verify such as if the increase in subscriber number real? How do they count subscribers? Are inactive members (members who are suspending their accounts and not paying) counted as subscribers? Among all people around me – people in my office, my relatives, and my friends range from 17 to 70 years old – the total number of subscribers to Netflix have been roughly unchanged over the past two years. Few people newly subscribed to it, and few people dropped their subscription. I am really wondering where are the populations in the U.S. that the company claimed to have just discovered and loved the service so much that so many of them jumped on board in the past two years? I personally feel that the movie rental and viewing population is pretty much like the PC usage population and should already been pretty saturated in North America?

I did not go into details of financial statements and challenged the numbers because, unlike Muddy Water Citron Report, and many “professional shorts”, I normally give the benefit of doubts to the management team unless some numbers fall into the range of absurdness. Even if there is some chance that the values of certain lines in the financial statements might hold water, I’d leave the whistle blowing obligation to their internal accountants and auditor. In addition, I do not have as much resource and capital as Muddy Water and Citron to dig out some hard to get documents in order to expose a company’s accounting manipulations (yet I need to stress again that in my view not all their accusations are correct). This is a good example of what I meant by Wall Street’s discriminative treatment of American firms vs foreign firms in several posts including this one: http://www.staranalystonline.com/2011/02/special-discussion-reliability-and.html. If this is a Chinese company, all these shorting specialty groups will rush to jump on board to expose all potential accounting irregularities on company at this lofty level of valuation. I guess everybody assumes that everything is fine simply because it is an American company and the CEO looks so righteous. This is exactly how we get American scams with manipulated financial bubble bloated to such a big size such as Enron, Worldcom, Movie Gallery, Bear Stearns, Lehman Brothers, and Madoff before being exposed. Then again, who knows? Many of these famous short houses have expressed opinions lately that it is now very hard to profit from shorting Chinese companies because the valuations of even legitimate ones have been depressed to underground levels. Muddy Water in particular might be turning their attention to American mid to big caps because their appetitive seems to be becoming bigger and bigger - from RINO to CCME to SNOFF. Sino Forest (SNOFF) in particular is a company with substantial business activities in North America and traded at multi-billion capitalization after several years of high-flying and being pumped hard by several big hedge funds including Paulson & Co before being attacked by Muddy Water. For readers not familiar with the story of how these quite powerful shorting groups have destroyed many high flying Chinese stocks (some of them have more believable financial reports than NFLX in my opinion) this year, I encourage you to search online and read how RINO, CCME, and lately SNOFF stocks were destroyed by them in matter of days after they published negative reports on these stocks. Netflix of course has bigger market capital and supports from more I-banks and funds than SNOFF. However, on the other hand it has much higher P/E multiple then SNOFF before struck down and has brewed a bigger bubble. So, I think these two factors are pretty much a wash in terms of potential effects from Muddy Water / Citron Research attacks. Even if Muddy Water or Citron Research just publish an informal inquiry to NFLX management with a list of suspicions like they did to SPRD in June (blogs.barrons.com/tech...), I think the stock will fall to 200 or lower in a couple of days. If Muddy Water or Citron publishes a full report declaring seriously accounting misstatements in NFLX, the stock may plunge to 50 within a couple of days.

I have sent emails to Muddy Water Research analysts (http://www.muddywatersresearch.com), its founder Carson Block, and Citron Research analysts (http://www.citronresearch.com/) telling what I have discovered so far on NFLX and asking them if they have taken a look at Netflix and if so what’s their view on its and whether they are working on anything regarding the stock. Right now I think it will help to have some very reputable whistling blowing and fraud detection specialists research on this stock for all investors.

Now, let’s leave concerns on accounting and financial side along and turn our attention back to business and economics. Basically there are two segments of Netflix’s business – physical DVD rental and online streaming. One the physical delivery side, I think there is no argument even from the pumpers that the outlook is pretty dire. Again, like PC industry, the market is completely saturated. Even assume what the subscriber number the company reported in the past two years did not hold any water, going forward new subscriber gain is likely to be small and will be offset by customer attrition. This is only the revenue side; the danger on the cost side is even greater. Inflation has been rising over the past year or so and is almost certain to be running high going forward. Gas price in particular has risen almost 50% in a year and almost doubled over the past two years. Meanwhile, USPS has kept the lowest mail delivery rate, the one that Netflix uses to transfer DVDs, at 44 cents for a very long time - more than two years since May 2009 (http://en.wikipedia.org/wiki/History_of_United_States_postage_rates), pretty much like China government rules retail gas price and always try to cap it at early stage of inflation in order to stabilize “social cost”. However, once the cost increase reaches certain limit the regulator will have no choice but to start raising the rates, often by quite huge extent in a series of raises. China government’s series of raises of retail gas and diesel price from Q4 2010 to Q1 2011 and USPS’ series of hikes on standard rates from 37 cents to 44 cents from 2006 to 2009 were good examples. In other words, the company has been taking advantage of this unusual generosity from US government and painting a false impression of artificially low and stable delivery cost for its DVD service over the past two years. Now, we all know that government subsidy to a lot of things including to USPS going forward will inevitably shrink due to current budget and national debt crises. What if USPS raises the rates to 47 cents next month, 50 cents in the end of the year, and 54 cents again at mid 2012? The impact to Netflix’ cost of goods sold will be quite material.

The other side of business – streaming video – isn’t fairing much better either. I just don’t know why some stock commentators and I-banks keeps on hyping the prospect of this chunk of business. Again, it is a pretty standard, low tech, stuff by now. Even I myself wrote a web application that provided online video viewing and video conference in three months when I did some system developments about 10 years ago. Today I can hire a team of five computer science graduates, purchase several high-end servers and racks of disk-storages and created a pretty professional Netflix, Youtube, or Hulu like video viewing web application in three to six months. There is a reason why we see online streaming service offerings suddenly sprouted over the past two years. It is not that this business is so lucrative or what, it is simply because this business has low level of entry. In fact, for many services the traditional brick-and-mortar model has higher barrier to entry than new online model because capital requirements and system development time are more stringent when companies are doing physical business. For example, in physical mail delivery several big players – UPS, Fedex, DHL – dominate the market and earn quite good margins, but in online form of mail delivery, e.g. emails, the situation is totally opposite. There are countless of email service providers online, nobody really dominate the market, and the worst thing is that nobody really earn any meaningful profits from the business because, well, most email services are free, and even big companies with huge base of customers in other service segments – Microsoft, Google, Yahoo, etc. – cannot do anything about it because if you don’t offer it free, nobody will sign up to your service since there are abundant free lunches out there. Same thing apply to web hosting, messaging (including “video” conferencing), image sharing, and even network connections (dial up, DSL, cable, wireless, whatever). Streaming video might fare a little bit better as least for now, but it pricing power for Netflix or anybody else is still very weak. That’s why we see free movies, TV, and other videos flooding everywhere on the web – Hulu, Youtube, Youku.com, Sohu.com, ppstream.com, BitTorrent sharing network, and more. If you think the number of new online video viewing portals over the past two years was large, wait until you see how many more will pops up over the next two years. I won’t be surprised at all if 20 more new or existing websites start putting movies online for people to view over the next two years. Why so many? Because as I said putting streaming videos on websites is not a high tech but a low tech for programmers now. However, something can be easily done doesn’t mean that companies can make a lot of money out of it. Actually, it is quite the opposite. When there are 30 online movie viewing sites out there, none of these sites, including Neflix will have any bargaining power with the upstream of the supply chain – the movie studios. People will be reminded again that the majority of value creation and critical point of the video entertainment business is the movie making, not distribution. The “concentration of value” and “imbalance of power” will become even more obvious when movies are distributed over the web rather than through physical means. I don’t understand why some people are selling the story that Netflix’ fate in this new business realm will be better than in traditional DVD mailing realm. What if most of its then remaining subscribers are using its streaming business paying $4 per month, and the company only owns 20% or less of market share in the U.S. two years down the road and has to spend a lot more on a much bigger content library to keep its customers satisfied? Honestly, I think Netflix right now is Yahoo in year 2000 at best and more probably AOL or Blockbuster in late 1990s.

I see that many speculators and momentum traders are still blindly jumping into the stock simply because a few TV commentators and I-banks are saying that nothing serious can go wrong to the company and there are still lots of potentials (in other words dreams). We’ll I won’t bet my fortune basing on their advice because most of them are not promoting the stock for the good of general public; most of them are pumping the stock for their own good because many of them and/or their friends have tons of shares on the stock to unload. I mentioned one CNBC commentator in my last post. How about Goldman Sachs? Well, the firm told investors that crude price would go to $200 (http://www.marketwatch.com/story/goldman-sachs-raises-possibility-of-200-a-barrel-oil) in 2008 when the commodity was already over $100 and close to $150 at its peak and when all economic signs strongly suggested drop in consumption, credit tightening, deteriorating financial system, and bubbling commodity prices fueled mostly by speculations. When crude pulled back from $150 to $130, just like NFLX has pulled back from $300 to $260 right now, GS and a couple other I-banks told investors that it was probably only a temporary pull back and that it was “healthy” for a run up to higher ground, like $200. Guess what? Woops, nope, their predictions were dead wrong. Crude plunged all the way to $30 before the bleeding stopped. It is only in the U.S. that most financial professional and firms producing this kind of damaging advice are not sent to jail, and hundreds of billions of tax payers’ money were spent to rescue them and went into their bonus pockets. I wonder how they can face themselves in the mirror if Netflix drops all the way to $60.

Disclaimer

Netflix, Inc. (NFLX) - Coverage Initiation

2011-07-26T19:00:00.000-07:00

Stock Covered: Netflix, Inc. (NFLX)

Current Stock Price: $272

Target Stock Price: $165

Rating: Strong Sell

Date of Analysis: 07/27/2011

Most my readers and followers know that I am a fundamentally and long-term focused investor, rather than speculator, manipulator, or gambler. As an investor, naturally I am heavily poised to take long positions in stocks and rarely take short positions partly because I am more enthusiastic to see companies succeed than fail and partly because most shorting ideas are more short-term oriented due to the nature of shorting. Occasionally, I do see situations when a stock has been hyped to an unthinkably inflated level and the assumptions that need to stand and events that need to unfold in order to future revenue and earnings to grow at the rates needed to support the lofty price level are dauntingly unattainable in statistical sense that shorting of the stock is at least an intriguing idea to me. One such example right now is Netflix (NFLX).

To begin with, Netflix already ranks at the bottom of industry list from my top-down selection. First, it is in a traditional, low tech business. Yes, not only its DVD service is old dog, but I consider even the streaming business is not any hot or new technology now. Secondly, the industry does not have any resource constraints or regulatory license requirements (unlike coal and oil industries LLEN and LPH are in). These two key characteristics of the industry mean that barrier to entry is low and competitors and imitators can get into the business and eat Neflix’ market share IF THEY ARE DETERMINED TO. Finally, it selling discretionary, leisure products, of which the sales are volatile and are usually cut relentless by consumers at economic down turn or when their pockets are tight (like right now when inflation eats into their income). Statistics show that just these three characteristics along almost ensure that a company’s ability to sustain above average revenue or profit growth rate (especially on the profit side because companies can expand revenue with the sacrifice of profit or even at a loss). As such, a company with these characteristics should be placed at a valuation multiple lower than those of other companies with similar short-term profit margins and growth rates. The valuation level and price trend of Netflix stock from 2006 to 2008 were generally in line with this principal. However, starting from the beginning of 2009 the stock suddenly roared out of gate and has kept on gravity-defying rise for about 2.5 years under the continuous gang blockbuster, herd flocking pumping by the CEO and whole bunch of hedge funds and bankers, sending the stock to a rightly money-robbing level of almost 80 times TTM EPS and 60 times FTM EPS basing on average first call analyst estimate (http://finance.yahoo.com/q/ae?s=NFLX+Analyst+Estimates), which is at the high end of the estimate of $4.20 to $4.50 from my statistical quant model.

Backing up this super long stretch of jaw-dropping price inflation were a series of actually not so jaw-dropping compounded annual revenue growth rate of only 26% from 2008 to 2010 and 33% from 2008 to 2011 (basing on average estimate of $3.27 billion revenue for 2011). In comparison, LLEN grew its revenue by 55% annually from fiscal year 2008 to 2010, LPH grew its revenue also by about 55% annually from fiscal year 2008 to 2010. Ok, ok, I know they are Chinese companies and small caps, but how about Apple? Even Apple grew its revenue by 42% annually from 2008 to 2008 and 49% annually from 2008 to 2011(basing on average estimate of $107.90 billion revenue for 2011). Why should I give Apple, a company with much more technology sophistications, a premium brand image that is untouchable by its competitors, and as a result much more solid advantages and secured revenue and profit growth rates, at only 16 times TTM earning while paying multi-fold price for a Netflix stock at 80 times TTM earning? I cannot think any reason from asset valuation stand point to give Netflix such a fat bonus in pricing.

Now, most investors, including the CEO and those hedge funds and promoters of the stock, would agree that the stock definitely should not deserve such a valuation basing on the revenue and earning trends over the past 3 years. So, what other selling points have they put in their marketing campaign to successfully fooled investors into giving them such a high price for each share of stock? A dream of worry-free growth for years to come mostly, a dream that is largely unrealistic and unlikely to come true.

Many investors, especially retail inventors, have amazingly short memory and forget lessons learned quickly. No stocks, especially stocks in traditional business (DVD rental certainly is, and in my view even streaming is not a hot new tech stuff anymore either), can defy gravity and shoot to the moon. People forgot what happened to Blockbuster, Hollywood Video, Movie Gallery (MOVI), and AOL. Like Netflix, Blockbuster and AOL, two names no less dominating and powerful in their respective businesses in 1990s than Netflix is today, fought hard to thwart off a demise of stagnating and thinking businesses replaced by similar, but improved, products or ways of service delivery. Let’s not forget how strikingly similar the situation of Blockbuster’s in 1990’s was to the situation Netflix is facing today. Blockbuster was a super Wall-street darling for a decade before start seeing real market erosion to new form or movie delivery by Netflix, pretty much like Netflix is facing competition from yet a newer form of movie delivery – streaming video – today. The CEO and most his “pumper alliances” – some hedge funds, I-Banks, and manipulators (including a notorious CNBC entertainer who told all viewers of his show: “Bear Stearn is fine! Do not sell the stock” two days before the collapse of the stock) kept on dismissing the power of Netflix’ competition even when the signs of Blockbuster’s revenue and profit growth slow-down manifests in the first couple quarterly reports (pretty much like Netflix’s last quarterly report). After a couple years of late into the game (pretty much like Netflix is to streaming video today), Blockbuster finally started adopting into the new form of business to try to transfer its revenue from old business to new business. Not surprisingly, the CEO told the public that the company would be able to dual with the product offerings from its major competitors including Netflix and Redbox and use its brand name to be the market leader in the new form of business. Sounds to me similar to what I have been heard repetitively from Reed Hasting and some analysts that that Netflix can trump online streaming offerings by all other competitors – Redbox, Hulu, Amazon, Walmart, Lovefilm, Youtube, Blockbuster, Zediva, cable service providers (e.g. Time Warner Cable), etc. Well, guess what? It’s the 100+ year old economics and statistics doctrine, not the CEO’s and hyping analysts’ optimisms, that stood at the end: Blockbuster did experienced major problems replacing all its revenue from then existing business model to a new business model and did lost quite an huge chunk of market to new competitors.

A more alarming, and maybe more similar comparison to Netflix from the aspects of logic-defying revenue/income growth and stock inflation, is MOVI. Like Netflix, MOVI was hyped to the core by hedge funds and speculators from cents to almost $40 a share when the company kept on beating analysts’ estimates for several years amid abundant skeptisms and warnings from several whistle-blowing fundamental focused analysts and the CEO kept on selling the fantasy growth story that the company could keep on multiplying even when it was forced to go out of its comfort zone and tread into an unfamiliar (and proven lethal) territory (see http://seekingalpha.com/article/315-movie-gallery-movi-meets-consensus-revenues-increase-15-in-quarter, http://seekingalpha.com/article/189-movie-gallery-movi-hits-consensus-blames-same-store-sales-decline-on-the-calendar-the-box-office-and-the-weather) until all of sudden all kinds of problems including revenue and earning shortfalls foretold by several insightful analysts sprouted altogether in a swift. After the first pull back from $37+, the truths of the company’s ugly margin squeeze and revenue contraction (a reversal from eye-popping growth like Netflix has been dishing out for several years) were quickly discovered, sending the stock to an almost free-fall to single digits within a couple months (http://www.businessweek.com/magazine/content/06_19/b3983073.htm, http://en.wikipedia.org/wiki/Movie_Gallery).

Even if Netflix CEO is indeed so superior in leading a company in a slow-growing industry to fight all competitions and cost pressures, I don't think he is a super man and don't think the stock can be worth even $200, a price level for a forward P/E of no less than 40. As one of the most famous sentences from Warren Buffett says: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Now, I am not saying that there is a 90+% chance that Netflix will certainly lost most of its business in the next couple years. However, to believe and promote the opposite – that there is a 90+% chance that Neflix will thwart off almost all competitions, not experience any problems in revenue transformation and margin pressures, only be affected minimally by equally or even more technologically advanced rivals, and keep on enjoying 30+% YOY top line and bottom line growth every quarter going forward – criteria that need to be met in order to even marginally justify the stock at current valuation level – is an unconscionable and completely irresponsible thing for me to do as an analyst. Of course, there have been a lot of talks about international expansions – Canada, Europe, Latin America, etc., but really, how successful the company can be in competing in Europe, a place where people heavily favor local brands and American products are not particularly successful and where most people are struggling to even make ends meet at heavy debt crisis right now? Will Latin Americans be willing to pay high enough even to pay for Neflix costs in these countries? Canada? Forget about it. It is a country with combined buying power roughly half of California. It will not save Neflix in any way. China or India in the future? Ah I won’t count on those either. People there don’t pay for copyrighted materials. In fact, Netflix should thank god that most American consumers haven’t realized that they can watch a lot of movies free on Youku.com, Sohu.com, and many other web portals in China (many people from China living in the U.S. do and thus never use Netflix).

As said I think the company will deliver full year EPS of $4.20 - $4.52, below or match current analysts’ consensus EPS estimate of 4.52 in the best case scenario with noticeable revenue/earning miss against existing street forecasts for Q3 and Q4 (sure these forecasts are likely to be slashed by some first call analysts in the next a couple weeks). For 2012, currently probability weighted mean EPS is somewhere $4.20 to $5.00 by my calculation, meaning that YOY earning growth will be single digit if the company only experiences moderate slowdown in its growth and possibly negative if domestic subscriber attrition deteriorates. At current a price of $272, the stock is trading at 55 - 65 times two-year out earning. Under universal methodologies and principals for valuing assets and earning streams, I cannot see why I as an investor should buy an asset that give me less than 2% return on invested capital (inverse of the P/E of 50), with returns growing at only single digit, and facing all kinds of downfall risks. From purely intrinsic valuation stand point I would only pay $100 top for the company’s $4.52 EPS this year and low growth rate going forward. Understanding that in stock market an overly hyped stock can take some time to re-align to its intrinsic fair value, I’d say $150 - $180 might be a reasonable equilibrium price for the stock to adjust to by the end of the year.

Another telling sign that has been sneaking under most investors’ attention radar is the staggeringly lopsided insider sells versus buys over the past 12 months: http://www.nasdaq.com/asp/holdings.asp?symbol=NFLX&selected=NFLX&FormType=form4

Sure, insiders can sell occasionally for need of cash rather than being bearish on the business outlook, but unloading 7 million shares (about 14% of shares outstanding) in 12 months and 1.66 million shares (over 3% of all shares outstanding) in 3 months while only buying only tiny 52K shares in 3 months is never a kind of normal, measured selling. Even if most of the sells are conducted under pre-arranged automatic periodic option exercising and simultaneous stock sales, the pace of the program as a whole is still a rush sale and a vote of pessimism on future stock movement in the minds of the management team and board of directors. If the outlook of the company is really so bright as some analysts have been painting and the stock should be able to be justified at higher prices within a year, while don’t the management team and board of directors accumulate more shares or at least slow down selling of their shares? The answer: because they know likely pretty soon the game of “I am buying the stuff regardless of how ridiculous the price is as long as I can sell to the next fool willing to pay even higher prices”, the game that so many irresponsible people played in housing bubble, will be over.

Disclaimer

My Conundrums for Harbin Electric Inc. (HRBN) Buy Out Deal

2011-07-22T08:00:00.000-07:00

All my readers and followers know that I am generally bullish on Chinese economy and companies and a strong believer of the values the assets and operations in China can bring to the investors and to all people in the world. I have used several recent examples of drastic price appreciations on several beaten down Chinese stocks from various direct intervention maneuvers (mostly institutional purchases or buyout offers), including the buyout offer on HRBN, to illustrate how imminent price correction by arbitrations on LPH, LLEN, and even ACTS can happen any day.

Even though I am a strong supporter for Chinese economy and stocks, I am proud of my ability to give unbiased valuations and analysis of these undervalued stocks basing on solid information and data and am not afraid of taking bearish stance on some Chinese stocks at certain moment when I feel something is not right. This is why I was bearish on CCME right from the very early stage of the fraud discovery of the stock (http://www.staranalystonline.com/2011/02/special-discussion-reliability-and.html). Today, I am going to share my thoughts on the buyout offer of HRBN, which might surprise some Chinese small cap investors and anger some. Note that this is only a casual article and is not a full coverage of the stock I do not intent to cover the stock any time soon because I am not bullish or bearish on the electric machinery industry.

I have been watching the tape play on HRBN over the last month or so and paid special attention on the violent debates between shorts and longs everywhere. There are too many things can be discussed from too many angles on this thing; I don’t have time to go into details on all of them and don’t believe the most topics will really help in settling the issue. For one thing, the proposed buyout offer of $24 per share is roughly 10 times of TTM EPS and 8 times FTM EPS assuming that the reported and estimated results are accurate and reliable. So, from purely static valuation standpoint it can certainly be argued that the $24 price tag is not a bad deal considering that electric machinery makers with similar growth rate are trading at P/E multiples of 12 - 15 in Hong Kong and China, although some may argue the other way that compare to current valuations of most Chinese small/mid caps the valuation is above average, which brings up the point below that keeps me wary of the situation. At a P/E of 8 to 10, there surely can still have some room for the buyer of the company to gain if the buyer later lists the stock in Hong Kong or mainland China. However, for the effort and fees a buyer needs to go through to list a stock in another exchange, a 50% arbitrage gain before fees is not too exciting for most arbitragers of this kind, at least not for me. That’s why when in my argument for a LBO of LPH and LLEN, I targeted a forward P/E of 4 – 6 because I believe at these multiples the potential arbitrage gain of 100% or higher is more satisfactory for most arbitragers (note that average P/E multiple for energy companies are higher than the average P/E multiple for machinery companies in China because revenue and profit for energy companies are more stable and the industry is in hot demand). Nonetheless, it is not to say that the buyer of HRBN cannot be content with this lower rate of return. Investors can have different return objectives.

The single, critical, unsolvable puzzle in my mind that keeps me from buying into the authenticity of the CEO’s buyout story is this: from the perspective of the buyer, $24 is almost THE WORST PRICE that a buyout suitor needs to spend on the deal. Here are several key facts: (1) the average trading volume was about 2 million shares per day for several weeks before the announcement of the deal, (2) the stock was trading at $6+ before the announcement of the deal, (3) the stock has fallen over 60% within about a period of 2 months before the announcement of the deal, breaking almost all technical supports along the way and making a lot of people desperately lining up to sell at the moment due to margin calls and stop loss, and (4) the group already owns about 40% of the shares outstanding and need to buy the remaining 60%, or about 18.5 million shares, or roughly 8 times daily trading volume.

I am not the best trader in the world, but my 15 years of trading experience tells me that if I had been a buyout suitor of the stock I could have easily accumulated at least 12 million shares for an average cost of $12 - $15 per share within a month considering all of the factors listed above under the situation of supply overwhelming demand on the stock at that time. I think most I-Banks, funds, and other experienced traders will agree with my assessment. In other words, the CEO and his fellows can easily save 40% (assuming average purchase price of $14) on 2/3 of their target shares, or roughly $120M, by buying these 2/3 of shares on open market and then offer to buy the rest at $24. In fact, in my opinion this is only an average execution and average outcome for a buyout suitor at that time. A good execution would have been like this: (1) being even more patient and accumulating 6M shares of the stock in two weeks from $8 to $5 for an average price of $7 as the stock likely would have kept on drifting down further from $7 under Citron’s ruthless attack at that time, (2) accumulating additional 6M shares on the way up from $8 to $15 for an average price of $12 in the next two weeks (by this time the CEO had have to file a couple form 4s and many investors would have been aware of his intention), (3) offering to buy 6.5M remaining shares at $22, 38% - 45% premium over the then stock price after open accumulation. The average cost under this scenario would have been about $14 per share, a $10 per share or $185M saving!!

Instead, the CEO rushed in dishing out an outright offer with a price tag at almost high of 3-year price range of the stock without even trying to the least effort to save for him and his group. Why? There is a terrible thought in my mind that I hope is not true: can it be that the CEO know that the deal won’t go through at the end (and know that he does not have to spend any money at the end) and thus chose to give a very high offer to push the stock to a higher ground in order for himself to unload his shares, like a player in a Texas Hold’m game suddenly going all in on a total bluff and trying to scare opponents with superior hands away? The rebuff to this is that the CEO is not allowed to sell shares now under the buyout agreement and even if he dumps shares he will not be able to sell much at high price because the public will see what he is doing once they see the form-4s filed for these selling. However, all these are assuming that the CEO is integral and still following the rules. If he has been deceiving the public for years (and thus will be convicted at the end with his stock becoming worthless), what can stop him from fooling the public one last time? Again I am not saying this is really happening; it is only a hypothesized scenario. What I am saying that the assumption that the CEO was not honest before can be consistent with the assumption that he is not honest right now. On the other hand, assuming the CEO is an average or above average honest and good-hearted rational business decision maker like the CEO of LLEN, LPH, and many other Chinese companies I believe, the way he handled this buyout seems to be inconsistent with this assumption. To make his behaviors logical we have to go to the other extreme of the spectrum – assuming that he is an extremely integral and nice business man with extreme sense of justice and passion to defending his stock and company. So, in my opinion either he is a pure devil or great saint. It is black or white, all or none; there is nothing in-between that can be logically explained at this moment. For the good of numerous die-hard shareholders loyally holding the stock right now at almost $20 per share, very close to the buyout price, I certainly hope he is indeed a saint.

Two “technical” arguments supporting the legitimacy of the buyout offer are: (1) the CEO simply had no other choice because it is impossible for him to buy several million shares and increase his stake to 70% of the company without pushing the stock to over $20 or higher, and (2) it is impossible for the buyer group to pull out of the deal this late into the process. While these two arguments do have some merits, they are not convincing in my opinion.

First of all, a company can certainly have 70% or more of its outstanding shares owned by one person or a group of people yet still having its stock trading a super low valuation level. The situation is especially easy to happen on any Chinese small cap this year. LPH is a perfect example now and more so in 2010 and 2009 (when the two biggest shareholders owned over 80% of the company). Similarly, many Chinese stocks accused of fraud saw their shares staying at low valuation level even after the company or its CEO offered to by millions of shares. Look no further than CCME or an example. As such, I believe the CEO definitely had a good shot to buy millions of shares under $15.

Secondly, I agree that it would will take the buyer or the board of director quite some effort to abort the deal right now and that an abortion of the deal at this moment would probably shock the market, but I think the process is far from being at a point when the chance of the deal falling apart is next to nil or negligible. Take the fall-off of XING’s proposed acquisition of QXM after almost one year of progress as a perfect example: http://secfilings.nasdaq.com/filingFrameset.asp?FileName=0000950123%2D11%2D033769%2Etxt&FilePath=%5C2011%5C04%5C07%5C&CoName=QIAO+XING+UNIVERSAL+RESOURCES%2C+INC&FormType=6%2DK&RcvdDate=4%2F7%2F2011&pdf=.

Of course no two cases are the same, but I am just saying that from purely probability and procedure standpoints, there are still many reasons that the deal can be withdrawn by a party or by court, especially considering the number of parties involved, the complex deal structure, the abundant of covenants, provisions, and conditions (subject to part xxx’s due diligence, subject to xxx’s review, etc.) in the agreement, and the nature of the agreement as a “merger” agreement rather than a more standard purchase agreement in a LBO deal. I especially do not like this part of the termination provisions that “If the Merger Agreement is terminated under certain circumstances, the Company will be required to pay Parent a termination fee of $22,500,000” and the “Limited Guarantee” by the CEO (Parent) to the Company, which pretty much reads to me that there is in essence no guarantee because the CEO can easily walk away under the reason that just one of the numerous “terms” and “conditions” is not met at the end.

It would be great to all Chinese companies, investors, and the nation if the CEO is an example of such a generous, honest, and good-hearted business man that is 100% selfless and put the interest of all shareholders before himself without reservation. For the good of Chinese stocks, investors, and analysts’ community I sincerely hope that he is such a nice business man. Let’s hope that the deal will indeed go through and do give Chinese small cap group another blow.

Disclaimer

Berkshire Hathaway Inc. (BRK-A & BRK-B) - Coverage Update - 05/09/2011

2011-05-09T22:12:00.000-07:00

Stock Covered: Berkshire Hathaway Inc. (BRK-A & BRK-B)

Current Stock Price: BRK-A: $121,500, BRK-B: $81.00

Target Stock Price: BRK-A: $134,131, BRK-B: $88.00

Rating: Hold

Date of Coverage Update: 05/09/2011

Berkshire Hathaway announced Q1 2011 earning on 5/6/2010 (Friday). Revenue came in at $33.72 billion, 5.25% YOY increase from Q1 2010. Net Income came in at $1.51 billion, 58.4% decrease from Q1 2010.

One flow to Berkshire's bottom line last quarter was $1.7 billion in insurance losses related to the March 11 earthquake and tsunami in Japan, the Feb. 22 New Zealand earthquake, cyclones and floods in Australia, and other disasters. The magnitude and number of the disasters in one quarter was probably the highest in the past several decades. Thus, the loss was dimed abnormal to BRK’s business and beyond most people’s estimate (including mine). Per Buffet, "We had probably the second-worst quarter for the insurance industry in terms of disasters around the globe".

Unfortunately for BRK, negative impacts from these abnormal insurance losses will probably keep on pounding the bottom line of its insurance segment for the rest of this year. The $1.7 billion in losses is an estimate of Berkshire's insurance and reinsurance claims that will be settled and paid over time, though that figure could change, the company said. Basing on what I see in other similar disaster-driven loss-write-off events such as Katrina, BP oil spills, and more recently Japan auto makers’ estimates of production and asset losses, initial estimate almost always is too optimistic. Knowing that Buffet and his team are top of the industry financial gurus who should do better than average in forecasting financials, I would take only additional $400 billion (about ¼ of $1.7 billion that is already booked) off my estimated bottom line for 2011 to account for extra insurance losses from disasters.

Berkshire reported an $821 million underwriting loss for the quarter because of the catastrophes. That compares with a $226 million underwriting gain in last year's first quarter.

A good news for its finance and financial products segment is that BRK has just reached a settlement with Goldman Sachs to redeem a $5 billion investment on bad credit securities (http://www.bloomberg.com/news/2011-05-09/berkshire-will-record-1-25-billion-gain-on-goldman-redemption.html?cmpid=yhoo). This will give BRK a one-time $1.25 billion gain on investment, which is expected to be recorded in the 2^nd quarter. Beyond that, if BRK reinvest this capital into fixed income instruments, the return on financial investments it gets will be lower because of current low short and long term interest rates. For this particular reason, I believe that BRK will keep on utilizing its cash in acquiring operating assets, especially ones in emerging markets such as China or Brazil, going forward because the relative returns it can get from these assets are much higher than that from financial assets in the U.S.

Financial Estimates:

On an annual basis, due to significant loss from insurance business, which will be partially but not totally offset by $1.25 billion gain from settlement with Goldman Sachs, I adjusted my estimate of net income from its existing portfolio downward from $13.615 billion to $12.75 billion.

Also, it appears that recent incident of David Sokol has caused temporary turmoil in the top decision making group and drag on the execution of new acquisitions. Therefore, I believe that the probability weighted amount of acquisition on big caps in developed market has dropped from $25 billion to $20 billion, and the probability weighted amount of acquisition on small to mid caps in emerging markets has dropped from $5 billion to $3 billion. Naturally, the net profits contributed from these acquisitions have decreased.

As the updated table of pro-forma financials below shows, updated estimated 2011 net earning is now $15.03 billion and EPS of $8,942.

	Asset	Net Earning
	Asset	2008	2009	2010	2011	2012
Current Portofoilio	334,002	4,994	8,055	12,967	12,750	13,133

New Developed Market Value Acquisitions / Arbitrations	20,000				1,800	2,160

New Emerging Market Value Acquisitions / Arbitrations	3,000				480	720

Total Net Earning		4,994	8,055	12,967	15,030	16,013
EPS		3,224	5,193	7,928	8,942	9,271

Valuation:

The P/E ratios of the comparables used in my coverage initiation almost have not moved since my coverage initiation. Please see below table for updated ratios. Even after the incident of Sokol, investors still have high faith in the management team and the company and have no intention to lower the valuation level of the stock. I expect that the stock will stay above the valuation level of 15 times earning for the foreseeable future and thus decide to keep this ratio when composing fair value and target price of the stock. Applying 15 to the EPS of $8,942 will arrive a target price of $134,131 for BRK-A. I expect BRK-A to enjoy slight valuation premium over BRK-B and thus have assigned a target price of $88.00 for BRK-B.

Because the updated fair value is less than 15% higher than current stock price, it no longer satisfy my criterion for a buy rating. Thus, I accordingly changed my rating from buy to hold for both BRK-A and BRK-B even though it is still more likely than not for the two stocks to be higher than their current levels one year from now.

	SPDR S&P 500 (SPY)	PowerShares RiverFront Tactical Gr & Inc (PCA)	Vanguard Total World Stock Index ETF (VT)
P/E	14	13	13

Disclaimer

My analyses are completely independent and are not paid directly or indirectly by any company of which the stock I cover or by any third party. However, I may have long or short position on a stock I cover during the period the stock is covered on Star Analyst Online.

My ratings and analyses of a stock only represent my personal assessment on the probable movement of the stock price in the next 12 months. They are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely for buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences and needs when making an investment or a trading decision.

Berkshire Hathaway Inc. (BRK-A & BRK-B) - Coverage Initiation

2011-03-17T22:52:00.003-07:00

Stock Covered: Berkshire Hathaway Inc. (BRK-A & BRK-B)

Current Stock Price: BRK-A: $124,025, BRK-B: $82.73

Target Stock Price: BRK-A: $148,726, BRK-B: $99.00

Rating: Buy

Date of Coverage Initiation: 03/17/2011

Re-written and re-published and re-published to SeekingAlpha. Read full article here.

Disclaimer

I am a completely independent analyst and am not paid by any company I cover or write articles about. However, I may have long or short position in a stock I cover or write about at any time.