• Valuation: Facebook went public with a valuation of $104 billion, which was simply too high. At that price, even if Facebook improved remarkably, there would be little room for the stock to run.
• Stock Lock-Ups: Another major issue with the Facebook IPO is that the company had promised shares to employees as well as early investors. Many of these groups had no interest in holding the stock for the long term, and as a result, when these lock-ups expired, shares would inevitably flood into the market.
• Poor Monetization of Mobile: With each passing quarter, Facebook is reporting a larger percentage of their traffic is shifting to mobile, with a growing number of users exclusively using Facebook on their mobile phones. Unfortunately for Facebook at the time, they reported that they were not able to effectively monetize this mobile traffic and may even lose money as users go from PC to mobile.
• Over-reliance on Zynga; Zynga has been dying for awhile, and Facebook’s profits were far too tightly tied to Zynga, a game-making company which has been on the down-turn as the FarmVille fad is winding down.

So What’s Changed?

If you have been wanting to get into Facebook, fortunately these negative factors have significantly improved for the better since the IPO:

• Valuation. Facebook’s market cap is now down to a much more reasonable $59.5 billion at the time of this writing. This much lower cap gives the company a much better upside for growth investors.
• Stock Lock Ups: Most of insider and early investor stock has been unlocked at this point, resulting in a more “true” price of what Facebook shares are worth.
• Monetization of Mobile: Facebook reported that their sponsored stories program has done well for them and that revenue per user is significantly up on mobile. I also believe that mobile advertising has a big upside for Facebook and that Facebook ads are still undervalued. The way Facebook ads work is that it is a competitive marketplace – the more advertisers, the more expensive the slots are for those advertisers. As more money moves onto the Facebook advertising platform, the amount of money Facebook will make from each user will increase.
• Separation from Zynga: A few days ago Facebook finally announced that it would no longer be giving special treatment to Zynga. Previously, Facebook and Zynga had a special advertising contract that gave Zynga lower rates and more prominence on Facebook. Facebook is no longer solely relying on piggy-backing on Zynga’s digital sales and advertising budget in order to turn a profit.

Is it the Right Time to Buy?

While the fundamentals for Facebook have significantly improved, the stock has run about 30% in the last month. Despite the big run, the stock is still significantly down from its IPO. While the stock is up, there is still plenty of room to grow, particularly if there is a pull back or market correction in the next few weeks.

In this article, I will simply cut to the chase and describe what the fiscal cliff means for the stock market and how to invest around the possible outcomes pushed forward by the government.

Exactly what is the Fiscal Cliff?

The term “fiscal cliff” is used to describe the pending expiration of the Bush Tax Cuts. Upon taking office, President Bush issued some broad tax cuts, particularly for wealthy individuals. While taxes dropped for classes across the board, these cuts definitely benefited the wealthy much more than the average individual.

Before you question why such a biased tax cut would pass, remember that at the time unemployment and gas prices were much lower whereas property values were much higher, resulting in the average American being in a much better economic state than today. Before the housing crisis and subsequent stock meltdown, citizens equated society’s top earners more frequently with feel-good success stories and the American Dream whereas today the rich today are not so nicely regarded.

Breaking Down the Bush Tax Cuts

There are two major portions of the Bush Tax Cuts that are significant for us: investment taxesand other. There is no reason to make it more complicated than that. Each category represents approximately half (the investment income portion is in reality less than half, but for the sake of discussion and ease, it is a safe assumption) of how much revenue the US government would gain in increased tax revenue by allowing the cuts to expire. However, each one of these categories could affect the economy and the markets in very different ways.

Investment Tax Hikes with the Bush Tax Cuts

With the expiration of the Bush Tax Cuts, federal income tax on capital gains from long-term investments and qualified dividends (stocks held for at least 1 year) will go up from 15% to 20%. Federal income tax from short-term capital gains (stocks held less than a year before being sold) is taxed at the same rate as regular income.

While short-term will still be taxed like regular income with the expiration of the Bush Tax Cuts, the rates will go up, since the income tax on the nation’s top earners will go from 35% to 39.6%.

The Medicare Surcharge Tax

In addition to the fiscal cliff, there just happens to be a new tax commonly known as the “Medicare Surcharge Tax” going into effect January 1st, 2013, regardless of whether or not Congress and the President come to a resolution on the fiscal cliff.

This new tax will tax investment earnings by 3.8% on the nation’s wealthiest annual earners ($200,000 for single people, $250,000 for married people). This means that the tax rate for long-term capital gains will increase from 15% to a minimum of 18.8% (even if the Bush Tax Cuts are extended) or 23.8% if they are not.

Impact on the Stock Market

Many investors fear that raising taxes on investment income will result in a major market plunge should a resolution not be made. However, this is not entirely true. There is likely to be some short-term losses as investors take their profit, wait for a favorable entry point, and re-invest in the market.

To simplify, if an investor bought stocks worth $10,000 some 20 years ago and over time these stocks have grown to be worth $1,000,000, if they sold them at a 15% tax rate, they would pay about $150,000 in taxes. With the Medicare surcharge tax coming the first of the year, they would pay about $185,000. If the Bush Tax Cuts expire, they will pay around $238,000 in taxes.

By selling before the first of the year, they can save nearly $90,000 in taxes, which is quite a bit of money. Such an investor can then put this money back into the market, so when they cash out again they will only be paying the high tax rate on their profits on that million dollars, rather than all the way from their original $10,000 investment.

Some of this is likely to happen regardless of whether the Bush Tax Cuts expire or not due to the Medicare tax (which I might add gets very little exposure in the media since it is not as exciting as the fiscal cliff debate). In fact, a lot of this selling off has already happened and is the primary reason why the markets have remained flat in the past few weeks despite retailers reporting excellent sales and Greece looking much better than it did last month.

Effect on GDP of Investing Tax Hikes

While temporary selling may occur with an increase in tax rate, the gross domestic product (GDP) will not be significantly negatively impacted by an increase in investment taxes. Increasing taxes on investments is not going to plunge the economy into a recession.

While investors will complain about extra taxes, there is still money to be made in the stock markets whether taxes go up or stay the same. In fact, by reducing our national debt over time, such a tax increase may actually strengthen the market within a few years.

The “Other” Section

The “other” portion of the Bush Tax Cuts includes the income tax bracket reductions and various tax credits. The Bush Tax Cuts rolled back federal income taxes by a few percentage points for all Americans and the various tax credits gave extra deductions for children among other things.

Additionally, when the Bush Tax Cuts were extended 2 years ago, upon their expiration there was automatic spending cuts included in the bill. Should no agreement be reached in Congress, these spending cuts will go into effect.

Contrary to popular belief, expiration of the non-investing tax cuts will actually likely impact the stock market a lot more (at least in the long term). This is because the “other” portion of the Bush Tax Cuts makes up a much larger portion of our GDP. More of money returned to these tax cuts goes to lower and middle-class Americans, who then in turn spend this money on daily things, which increases the size of our economy. The spending cuts also will reduce GDP, at least temporarily.

Should we fall off the fiscal cliff, experts estimate our GDP could shrink by as much as 4%, and most of that shrinkage will be the result of losing the tax cuts in the “other” category. This could cause the market as a whole to suffer for all of 2013 and even for a bit longer, at least until the extra tax revenue can pay down the national debt enough to strengthen our economy’s outlook.

How the Fiscal Cliff and Proposed Resolutions May Affect the Stock Market

Here are the possible resolutions of the fiscal cliff and what their impact could be on your portfolio. If the cuts are extended in full, the markets likely to bounce up at the news, but would ignore the growing debt of the US, making the foundation of the United States’ economy less concrete. In an effort to reduce national debt, such a resolution is not guaranteed.

Far more likely is some sort of compromise, but the nature of the compromise may effect the performance of the market differently. Spending cuts and allowing the “other” portion of the tax hikes to go through will decrease our GDP, leading us into a recession. Such a contraction in GDP could have a year-long (or more) stifling effect on the market’s performance.

By comparison, increasing the capital gains tax rate is likely to temporarily depress the markets but they should shortly recover as money that was moved out of the market to get a good tax rate begins to flow back into the market.

A decision on what to do over the fiscal cliff could fit into any of these possibilities at this point. If an agreement is put forward, it will be critical to objectively evaluate in order to determine the best investing strategy for an individual’s portfolio.

While I am still undergoing treatment, things are going good so far and with a recent dose reduction I feel well enough to continue my work on the site, so regular posts and updates will start appearing again.

Finally, due to the nature of the illness, my goals for investing in 2013 will certainly be different than they were in 2012. At the end of 2012 I will be putting together a post with more details here, but for now, this is just an explanation for the readers on why I have not posted in so long.

Trades Made During March 2012

• 3/1/2012: Bought Solar Capital Ltd. (NASDAQ:SLRC) at $23.10.
• 3/8/2012: Bought McDonald’s Corporation (NYSE:MCD) at 97.01.
• 3/22/2012: Bought SLRC @ 22.05. After averaging the amount I paid for each share, this averages to $22.56 per share.
• 3/30/2012: Dividend from Wells Fargo & Company (NYSE:WFC) automatically reinvested into my holdings in WFC.

Transaction Summary

Most of the month, I kept most of my holdings. I added a lot more cash to my portfolio this month, increasing the cash I have invested by 40%.

Since most of my stocks have been on a run this year, I ended up sticking this money in SLRC while I wait for my primary 5 stocks to pull back. At the price I paid for it, SLRC pays around a 2.6% quarterly dividend which I think is safe for at least the next quarter. I plan on selling SLRC and adding more money to my current positions in the event of a pullback.

How to Invest HQ Portfolio Performance: March 2012

In the month of March, the net value of my portfolio increased by 3.05%. This is above the Dow Jones Industrial Average’s gain of 2.01% and slightly below the S&P 500′s gain of 3.13%. Below, I will take a look at my major winners and losers over the past month.

The Good: AAPL, WFC, T, MCD

Overall, the bulk of my original investments performed really well in March. Apple Inc (NASDAQ:AAPL) was up 10.53% in March and WFC was up 9.11%. AT&T Inc. (NYSE:T) also had a good month, moving up 2.09%. While that 2.09% move might not seem like much, you have to remember that AT&T has nearly a 6% annual dividend.

MCD gained a modest ~1% from where I bought it. I think it would have done much better if their long-running CEO did not retire this month. Temporary worries about leadership kicked the stock down a few percent from where I bought it, but it has since gone up and I think it will continue to do so over the coming months.

The Not So Good: COP, SLRC

While I had 3 stocks that did great, I had three other ones whose lack of movement reduced my overall return in the market. None of these stocks performed particularly poorly, but none of them did really well either.

ConocoPhillips (NYSE: COP) dropped .71% over the course of the month, but that was due to the fact that the price of light crude fell over 5% from the beginning of March to the end of the month. With projected increases in the price of oil in the future and the imminent splitting of the company, I think ConocoPhillips will rebound strongly in the next quarter, particularly if oil prices go up.

SLRC is not a stock I plan to hold for any length of time. I am simply holding my excess capital here since they pay a big dividend until one of my other 5 stocks pulls back, at which point I will sell the SLRC and move into my other positions.

Since my SLRC position did not really make any money this month (its about even, perhaps down a fraction of a percent when you include the dividend), my overall portfolio stayed in line with the market

How to Invest HQ Portfolio Performance Summary

Over the month of March, I posted a 3.05% gain, whereas the Dow posted a 2.01% gain and the S&P 500 increased by 3.13%. I had two nice gains in Apple and Wells Fargo, but overall I did not beat the S&P 500 since I increased the initial base investments by 40% this month, putting the money into SLRC, which has not moved yet.

Over the next few months, I plan to distribute that money amongst my 5 primary stocks (and possibly add more cash as well) as I think this will lead to solid returns. Right now the money is sitting in SLRC until I get a pullback worthy of investment.

Conventional Wisdom on Stock Buybacks

Many investing courses and texts teach that stock buybacks are an easy way for a company to boost earnings per share when other uses for the cash are not available. A stock buyback often results when a company is doing very well and earnings are great but they are unable to find an investment opportunity that can sustain growth.

In light of no other viable investment opportunities, a company can use a stock buyback to decrease the number of outstanding shares. By reducing the number of shares, the earnings per share will go up even if the earnings stays the same, thereby creating earnings growth even without extra revenue.

For example, let’s say a company is earning $10 million a quarter and has 10 million shares outstanding. This company then has an earnings per share of $1. If the company decides to buy 10% of their stock back, the company then all of a sudden is making $10 million a quarter on 9 million shares. This company is now making $1.11 per quarter, an increase of earnings per share of 11% with no change in revenue.

By increasing earnings per share, the shares will inevitably become more valuable, or so the story goes. While using cash to drive up earnings per share looks good on paper, it unfortunately rarely works out this way in practice. The problem is not that increasing earnings per share will not drive up stock price (it does), but rather that stock buybacks rarely result in any meaningful change in EPS.

Yes, you read that right: stock buybacks are justified by companies as a means to boost earnings per share, but stock buybacks rarely meaningfully influence earnings per share. This is why buybacks are useless to the typical investor.

Why does this happen? Here are the major problems with this approach:

Most Buyback Programs Are Too Small

One reason stock buybacks do not have a significant influence on earnings per share is because they are too small to actually to shrink the earnings per share at a meaningful level to an investor. Consider Apple’s (AAPL) recent stock buyback announcement, where the company announced they would be buying back $10 billion dollars worth of stock over a 3-year span.

This amounts to less than 2% of the company’s current market cap being purchased back over a 3 year period. This means that earnings per share might go up about 2% over three years as a result of this buyback, minus the growth they would have received by investing the money elsewhere.

You might be thinking.. why would a company buyback such a small amount of stock? Well that is because..

Most Stock Buybacks are not Meant to Raise EPS

Many companies issue these small stock buybacks with no intention of raising EPS. Instead, these shares are used as part of compensation packages for executives. Companies often buy back their stock and then give it all away to their executives and vice presidents as a way to pay management extra money. Stock buybacks are where the stocks for stock options come from in older companies that have been public for a long period of time.

There is nothing wrong with buying back some stock to reward executives who have run successful companies. For example, the $10 billion buyback on AAPL over the next few years is well-deserved as over the last 15 years they have gone from a struggling company to the largest market cap in the world at the time of this writing.

The problem is that many companies that do these buybacks are not doing as well as AAPL, using earnings to reward mediocre performers and then have the gall to announce the stock buyback as if they were demonstrating their strength and boosting earnings per share, when their plan all along was to line the pockets of management.

Of course, management cannot line their pockets unless they are actually selling the stocks they receive, which leads me to my next point:

Many Shares from Buybacks Eventually Reappear on the Market

When companies give out stocks as bonuses to executives, these executives then sell the stock in order to get money. I can’t blame them – they are being compensated after all with the stock. This stock gets sold to a shareholder like you or I and becomes part of the general shares outstanding once again.

That’s right, companies buy back stock and give it to executives. These executives then sell the stock, putting it right back on the open market. The end result is that the total number of shares outstanding does not change after the stock buyback (at least not as much as advertised).

Long Term Stock Buybacks May Secretly Fail

Sometimes the lack of a meaningful change in earnings per share is caused by the fact that stock buybacks often are never seen to completion. This is particularly true over buybacks which are announced that are covering a multi-year period. When a company says they are planning to buy back a certain number of shares over a multi-year period, this is something you have to take with a grain of salt.

When a company announces in 2012 that they are re-buying stock in 2016, if they nix the program and stop buying the stock in 2014 when money is a little tighter, most investors will be none the wiser. It is not really newsworthy when a company stops a buyback program they announced a year or more in the past.

As a result, be careful of buying on the news of a multi-year buyback program. In fact, I would not even consider multi-year buybacks as a plus for a company. The only thing I care about that far in the future when it comes to a stock is their projected earnings and growth opportunities.

A Dividend Boost is a Much Better Service to Investors

Not only as stock buybacks often misleading, but the simplest way to create wealth for investors is to give them the money directly. If a company was during well and truly wanted to reward its shareholders, it would boost dividends.

When a company is doing well and is truly looking out for investors, they raise dividends or even give 1-time bonuses. Not only is money directly in the hands of the investor the best course of the investor, it is also the most efficient course. Companies who have the money to buy back stocks are often running on 52-week highs – buying back a stock that has already run is a waste of capital.

Exceptions to the Rule – Spotting a Good Buyback

Like anything in life, there are some exceptions to this rule. The best buybacks are large buybacks which are slated to be completed in the year they are announced. Buybacks that can meaningfully increase earnings per share (i..e at least 8% of the company, in my opinion).

Furthermore, I like to see either a company which has a history of following through with its buybacks (check for any failed or cancelled buyback programs in the past) or an increase in dividend in conjunction with the buyback. I cannot fault AAPL for their $10 billion buyback over 3 years because at the same time they announced their buyback, they announced a dividend program which would amount to about $10 billion annually, a much larger portion than the buyback.

You should also know that some banks are being regulated by the Government in regards to how much money they can distribute via a dividend. After the banking bailout, the Government has set guidelines on what banks can and cannot do. One thing in particular the Fed has been doing is pushing banks towards stock buybacks and away from dividends, or at least making the banks do some of each rather than allowing the banks to issue a straight dividend.

The Truth About Stock Buybacks – Conclusion

No matter what the buyback looks like, as an investor I would always prefer an increase in the dividend or even a one-time payout over a stock buyback.

If I am holding a stock that goes up after a buyback is announced, I will enjoy the run up in price, but I will not jump on a new stock after a buyback is announced as most stock buybacks really mean nothing to your bottom line. Most buyback shares are given to employees and then ultimately float their way back out onto the open market, leaving you with the same number of shares outstanding as you had before the buyback was announced.

As a general rule, do not count on most buybacks to boost the earnings per share of a company or even the net worth of your holdings in that company over the long term.

The Deal with AAPL’s Dividend

Apple will begin paying out a quarterly dividend of 2.65 per share each quarter, or $10.60 annually. At $600 per share, this is a 1.76% dividend. While this yield may seem pretty low, consider that most tech companies do not pay a dividend and those that do pay a dividend also do not pay very much compared to other sectors and are not growing as fast as AAPL.

Furthermore, you have to consider that even outside of tech there are no large cap stocks in AAPL’s growth cohort that actually pay any significant dividend. By having a 1.8% dividend, AAPL is giving you a nice bonus for riding the wave of growth. The fact that you get a dividend at all on a stock which is growing earnings as fast as Apple is just the icing on the cake.

The real draw of the dividend is that once a company institutes a dividend, they not only tend to always keep it, but also strive to increase it. If you look at the history of other stocks, a $2.65 quarterly dividend is nothing to write off (it actually makes AAPL the biggest spender on dividends in the world!) and is a pretty good starting point. I would not be surprised to see this increase by 10% per year the next few years, especially with AAPL’s insane cash flow.

You have to remember that under Steve Jobs, AAPL had no intention of paying a dividend at all. Now that a dividend has been instituted, it is only going to continue to go up over time (at least as long as AAPL is bringing in billion of cash each year). While $2.65 may not seem like a lot now, I would not be surprised to see it at $4 in 5 years if the iPhone and iPad remain the king of phones and tablets, respecitvely.

If the Dividend is Great, Why Didn’t the Stock Run Up More?

I have read many people ask why the stock only moved up 2.68% after announcing the dividend. You have to consider that CEO Tim Cook hinted that they were discussing implementing a dividend back in January, and that AAPL has run up 48% since the beginning of the year. People started buying the stock back in January in anticipation of this announcement.

I suspect that the stock will continue to increase nicely over the next few months are more buyers enter the market. There is a lot of money in mutual funds which are required by charter to own dividend stocks, and now that AAPL offers a dividend, more money is free to move from those funds into Apple. The movement of money from these funds into AAPL will be a slow process, as managers tend to be slow when moving that much money into or out of a position.

About the Stock Buyback

Another reason the price of AAPL did not move up so much is that the buyback is not really newsworthy. If you are just learning how to invest, you have probably been told that stock buybacks reduce share count which in turn increases earnings per share which provides direct value for the investor. After all, with less shares on the market and a higher earnings per share, the P/E of a stock is automatically pushed down.

While this makes sense for large buys (i.e. 10%+ of the market cap of a company), it does not really matter in this case. Apple’s stock buyback is $10 billion over three years. With a current market cap of $560 billion, the proposed buyback is less than 2% of the company’s total value.

When you consider that this buyback is to occur over 3 years, it means that at best earnings per share will increase by a fraction of a percent each year as a result of the stock buyback. These very small moves are of no moment to investors. The buyback is actually not for investors but rather for AAPL to invest in its own employees. With small buybacks like these, companies intend to distribute these shares to employees as bonuses (particularly upper management). These employees then are likely to sell the shares as soon as they are eligible, meaning that these shares are likely to go back onto the market just as quickly as Apple buys them up.

You may be thinking.. why did they even announce the buyback then?  It is simply a way to say that they are investing in their management and that they are healthy enough to set aside $10 billion just to buy stock at an inflated price. This looks good to investors even if it will have no real effect on earnings per share.

As a result, the $10 billion spent on the buyback is actually part of an employee compensation plan rather than some sort of effort to increase earnings per share. There is nothing wrong with this – Apple has done great and I would rather see management paid plenty of money to stay on board and drive the company’s growth rather than having them get poached by other companies who lure them away with more money.

Speaking of buybacks, I will write a post on this within the next few days all about buybacks so you can understand the different ways they are used and whether or not a company’s buyback signals good things for the company.

Greek Bailout & Bank Stress Test – What it Means

The Federal Reserve’s “stress test” and approval of the latest Greek bailout by Eurozone finance ministers has given a huge lift to financials.

The stress test itself was a Federal Reserve exercise indicated to test the strength of the banks in the United States. The purpose of these tests was to see if certain questionable banks would be able to buy back stocks or raise dividends to stockholders. Previously the Fed had been throttling banks to prevent certain banks from distributing money to shareholders after getting bailed out by the Government.

Additionally, the Greek deal had been wearing heavily on the sector due to concerns that if the Greek deal did not go through, the Euro currency itself could become unstable. This drives people away from financial stocks, even those who have no major holdings in Europe.

As a result, with good news for most following the stress test and the Greek deal finally going through, financial stocks which have been lagging (slightly) behind other sectors in the overall 2012 bull market were able to rally today. Notables include Wells Fargo Company (NYSE:WFC) up 5.78%, JPMorgan & Chase Company up 7.03%, Citigroup Inc. (NYSE:C) up 6.3%, and Bank of America up 6.26%.

Note that Citigroup Inc (NYSE:C) fell 3.54% in after hours trading due to failing the Federal Reserve’s stress test.

The large gains across the board in the financial sector really helped drive the market to its best day of the year.

Retail Sales Increase – Affected Sectors & Market Implications

While increases in retail sales benefit the whole market, there are a few particular industries which benefited the most from this increase. First of all, .3% of the 1.1% increase was on gas spending as the price of oil has been steadily climbing as Iran and Israeli tensions increase.

Before we say that this means that true retail sales only increased by .8%, you have to consider that the fact that consumers are spending more on gas means they are not cutting back on their driving and are still spending, which means that retailers and restaurants which normally suffer at the hands of higher gas prices may not be so bad this time around.

Why is this the case in 2012? After all, last time gas prices were this high the market was at its lowest point and earnings and growth rates for many major companies were at historic lows. The primary difference this time around is employment; when people are not working and have to deal with higher gas prices, there is less retail spending.

The reverse is true as well – when employment rates are going up, spending goes up as well in spite of higher gas prices. Some of that extra income is naturally spent on gas (hence the .3% of the increase being related to gas spending) but still some of that extra money from more people working is being spent at other retailers.

The primary beneficiary of the February spending increase was car manufacturers as auto sales were excellent in February. Ford Motor Company (NYSE:F) is up 2.17% and General Motors Company (NYSE:GM) is up 2.68% today.

More Sectors Benefit in the Long Run

When retail sales increase, all sorts of cyclical stocks stand to benefit. When car production and sales increase, companies who make products for cars will inevitably have higher earnings. Companies that supply raw materials to the companies that make products and parts for car manufacturers will also generate more earnings.

In short, stocks of all sorts should and will continue to rally if retail sales continue their positive trend. The economy in the US is certainly on the path towards recovery; the only uncertainty in the immediate future is the tensions between Israeli and Iran.

My personal strategy for hedging against this conflict is to invest in companies which stand to have similar earnings regardless of whether or not the conflict in the middle east escalates. Of course, there is only so much you can do, as any increases in tension will increase the price of oil, which negatively impacts the earnings of many companies.

Wondering how to invest to protect against the rising price of oil? A good hedge against rising oil prices is investing in companies which sell crude oil. These stocks trade with the price of oil as their profits will increase as oil goes up in price.

Disclosure: I am long WFC and COP.

Many analysts had set a target on AAPL at $550 a share, but it does not seem like many people are taking profits as the stock actually went right past the $550 barrier with little resistance.

I do own AAPL stock and have no intentions of selling it at its current price level. In this quick article I will discuss why I think that now is not the time to take profits on AAPL and why this stock will continue to grow in value.

AAPL is a Superior Stock with an Average P/E

Even at its new highs, AAPL is only trading at a P/E of 15.72. This means that for every $15.72 you spend on AAPL stock, you are buying 1$ worth of earnings.

Furthermore, AAPL grew its earnings last year-over-year last year at over 70%! While 70% growth rate might not be possible this year, at the current projections, AAPL’s current price to its future growth rate (which is how stocks should be priced) is closer to a P/E of 13 or even lower.

This means that even if AAPL misses earnings, it is still likely to be trading at a lower P/E (if the prices hold the same; I predict the stock will continue to rise) than the average S&P 500 stock, which is trading at a P/E ratio of 14.

What makes AAPL so far superior to the average stock however is its excellent growth. What exactly is considered excellent growth? Like all things in stocks, that depends on the price – many investing pros recommend trying to get a stock which has a projected growth rate at 1% per 1 P/E that you have to pay for it.

To clarify, the projected earnings growth year over year for any given stock needs to be a higher percentage than its P/E for the growth stock to be a good deal. To growth investors, this means that it is okay to buy a stock that is trading at a P/E of 25 if its projected to grow earnings by 30% in the next year.

AAPL is only trading at 15.72 earnings and grew its earnings 70% last year and could easily grow them another 40-55% in 2012, yet it trades no where near that price.

You may be wondering how I arrived at such high growth rates. According to Yahoo! Finance, it reports its aggregate of 51 analyst projections if AAPL’s earnings to be $42.86 per share in 2012. Earnings were $27.68 in 2011. This is a growth rate of 54%.

AAPL would have to be approaching a P/E of 54 before it would peak in price based on standard growth investing principles. Based on those growth rates versus how the stock is trading now, the stock would need to increase in value by many times before it becomes overweight.

There is More to AAPL than Earnings

Not only does AAPL have great earnings growth and sell for very cheap, but its balance sheet is also a thing of beauty. Do not forget that Apple currently has around $100B in cash and no debt on their balance sheet. They also have an incredible free cash flow. These stats alone make it superior to the standard S&P 500 stock even if it had mediocre growth. A superior stock should trade at a higher P/E than its contemporaries.

I’m Still Holding AAPL

With fast growth, big earnings, and a low P/E ratio, I am not planning on selling my stake in AAPL any time soon at current price levels in spite of the nice 10% gain I have had since I picked up the stock a month ago. In fact, if I can catch it pulling back in the next month, I will be adding to my position.

What exactly constitutes a good deal? You can pick out the most stable stock in the world and examine its chart over the the course of a few months and you will note dips that occur at regular intervals. This happens even in secular growth stocks which only seem to go up over time.

The regular periods of a stock being temporarily lower in price is known as a dip or pull-back.  When a company is doing very well and the overall market sentiments are at least decent, dips tend to be temporary natural occurrences and make good buying opportunities.

For example, let’s take a look at the chart McDonald’s Corporation (NYSE:MCD). You can look up the charts for any stock online using Google Finance or Yahoo! Finance. As a side note, both of these sites are valuable resources; I prefer Google Finance for quick price checks as Google’s servers are much faster than Yahoo!, but for more in-depth details, Yahoo! Finance seems to have better information. With that said, here is the chart:

From December 12, 2011 to March 9th, 2012

While the font is a bit small, you can see that over the last few days that the stock dipped drastically in the last few days, down around 97$ per share. If you have been waiting to buy McDonald’s stock, this was as good of a time to buy it as you got in the last 3 months. Since I have been watching this stock for awhile now, I took advantage of the situation and purchased some shares at $97.01 each.

However, before you run in and grab a stock during a dip or pullback, you need to first make sure of two things: first, you need to evaluate just how good the pull-back is and whether it represents a buying opportunity or not. Secondly, you need to evaluate if the dip is just a dip (i.e. calling the bottom) or rather if the dip is part of a long-term trend. Let’s look at both below.

Evaluating the Strength of a Dip or Pull-Back

When buying on a dip or pull-back, you will want to be sure you get a good deal on the pull-back. While a 3% drop in McDonald’s was a great time to pick up the stock for me, for more volatile stocks a 3% drop may not be all that much.

One way to to evaluate whether or not a pull-back is just a blip in the radar or a good buying opportunity is by using the 50 day simple moving average. This is calculated by averaging the closing price of a stock over the last 50 days.

You do not have to calculate this by hand yourself. Instead, you can look up any stock you want on Yahoo Finance and then click the “Key Statistics” tab on the left hand side. In the data reported you will see the 50-day moving average already calculated for you.

To continue with the McDonald’s example, the 50-day moving average for the stock is $99.56 per share as of March 9th, 2012. Additionally, the stock has rarely dipped below this number by more than 1$ in the the last 50 days. With that in mind, the ~$97 per share you can get it at now represents a nice pull-back and a good entry point for buyers into the stock.

However, you do not always get such neat dips in a stock’s price. For example, if we look at another stock I own, Apple Inc., (NASDAQ:AAPL), you will see that this stock has not closed below its 50-day simple moving average for several months:

When a stock is hot and its stock price is practically nothing but up, it can be hard to find dips. However, even a stock like AAPL has brief dips, though they may only be intraday and they may not be below the 50-day moving average.

One example of this was around the opening of the market on March 6th. AAPL opened at $545 per share on March 5th, only to fall several percentage points down to $516 right after the market opened the next day. While this only a very temporary set-back, it did represent an opportunity to buy a stock at about a 5% discount. AAPL is trading back in the $545 per share range, so if you grabbed it when it dropped, you got a nice discount.

Finding Intraday Dips

In the AAPL example above, while that was well and good, that dip in price only lasted a few hours. Most of us mere mortals cannot track the ticker of a stock every hour of the day and wait for an unexpected drop in price.

Fortunately, there is an easy way around this. Some people decide on a price target (say, AAPL when it drops to $525 per share) and then put in a limit order and make it good for 60 days. This means that should the price drop that low, you will automatically buy the stock at that price.

While this sounds like a good solution, it presents one problem: sometimes news can send a stock tumbling and you may not want to buy it at that price. For example, what if you put in that limit order for AAPL and then it came out a few weeks from now (just an example) that AAPL was cooking the books and lied about their amazing earnings? The stock could become worthless overnight and you would be stuck buying it at $525.

The more elegant to this solution is to sign up for some kind of alerts system when it comes to your stock of choice. Personally, I use eTrade, and they have something called Smart Alerts, where you can sign up to be alerted if a certain factor of a stock reaches a certain threshold. You could set up a Smart Alert so that you get a warning whenever AAPL’s price dropped to $525 per share.

You could then scan the news headlines to make sure nothing bad happened to AAPL and if it was just a sell-off associated with no bad news, you could then buy the stock with confidence that it was just a temporary setback.

If you do not use eTrade, I am sure other brokers offer a similar service; check the help section for price alerts or call customer service with your particular broker and I am sure you will be able to set something up.

Evaluating a Pull-Back – Temporary Set-Back or Downward Trend?

If you buy the “dip” of a stock of a broken company, you may find that the dip is not really a dip but instead just the beginning of the downward trend in a stock’s price. For example, Pandora’s stock price recently fell 23% after they reported a huge earnings miss in the last quarter.

Does that mean it is a good opportunity to buy? In this case no; while I enjoy Pandora’s services, the company is hemorrhaging millions of dollars a quarter and this only seems to be increasing. While it generates more revenue each month, its expenses are exponentially rising due to the cost of intellectual property. This drop in stock price was not a dip but rather a deserved decrease in the value of the company due to their increasing losses.

In the case of McDonald’s above, McDonald’s reported lower than expected growth in same store sales in its Africa and Asia divisions for the month of February, which caused the stock to fall just over 3%. To me, this seemed like a slight bump in the road as McDonald’s still is projecting good earnings for the quarter, Furthermore, these divisions are a small part of their business. In the big picture, the results of one month of a small division do not mean much when the company itself is still strong.

Whenever news or an announcement sends a stock tumbling, you need to objectively evaluate what sort of impact this news will have on the stocks quarterly and annual earnings. Pandora announced that it was losing a lot more money than expected and its expenses were way up. This is bad news and means the stock fell because it deserved to fall.

McDonald’s reported that growth was slower than expected for this particular month in two divisions which only make up a minority of the company’s income and it still has good projections for the quarter and year. A dip in the stock price in response to this news is just the result of panicking investors and represents a good time for the patient to enter into the stock or increase their position.

Sometimes a stock may dip in price because the outlook for an entire sector is not good. When China reduced its growth forecast, the stock of Alcoa Inc. (NYSE:AA) tumbled because it does a lot of business with China. Alcoa is driven based on a growing China needing aluminum (Alcoa’s principle product) to help fuel construction.

While there was no news specific to Alcoa in this situation, by default less Aluminum demand from China will hurt AA’s bottom line. This means that AA’s outlook is not as good and its decreasing price may be deserved rather than a temporary dip or pull-back.

Avoiding Stocks that Have Already Run

The last thing you have to worry about when buying a stock on a dip or pull-back is getting into a stock after it has already run. Most stocks do not rise straight up but rather have strong runs followed by consolidation periods where the stock moves sideways and waits for its next run up.

Typically, good earnings forecasts result in a stock’s price running up. Once it runs, it often will meander for the next month or two and follow the general path of the overall index, waiting for the next bit of good news to drive it higher. You do not want to buy a stock that has already run if there no catalyst on the horizon.

One common example of this is retailers. Retailers like Dick’s Sporting Goods or Home Depot can have blow-out quarters and their stock can jump by 5%+ in one day. These growth explosions often occur on top of steady gains leading up over the previous weeks from investors expecting a big earnings announcement. If you missed the run, a 1% pullback or dip may not be a true pull-back if the stock has already run.

When a stock has run up 5%, 10%, or more after a good quarter and is not raising its outlook for the rest of the year, the stock may have already run and may not be going anywhere for a long time until it can produce those sorts of numbers again. Even if you want in, wait for a big (inevitable) dip in price before entering into large retailers that have run.

Another common area where this happens is during take-over bids. Once a bid for a company is announced, a stock’s price will often rocket higher with some of the biggest single-day moves you will ever see. This also happens when a company gets FDA approval for drug patents as well as other single-day events (approval for mergers, etc.) that drive the price of a stock up significantly in one day.

If you missed the run of the stock in these situations, you are too late! Buying on a 1% dip after a stock has just run up 20-25% is not a wise decision, especially in the case of a buyout. The stock has already run and it is not going anywhere.

The only exception to this is when you think a stock is going to consistently run higher based on its fundamentals (i.e. AAPL stock has run up a lot but still has a low P/E ratio based on its earnings growth) and you plan to hold it for a long period of time and are alright with dealing with a consolation period.

I bought AAPL after it had been running for awhile and it has continued to run up about 10% in the last month since I bought it. The reason I bought it because its P/E was still very cheap for a tech stock with massive earnings, even in spite of its run. It had been undervalued for so long I figured it could only continue to go up based on its numbers. However, if the numbers are not there, avoid stocks that have already had their run and have nothing else to carry them higher, even if there is a small dip or pull-back.

I am not saying do not buy stocks which are increasing in price. What I am saying is avoid buying into a stock that has just run-up in response to good earnings and has no conceivable announcements or news in the near future to drive its price higher. If the company is good, wait for a dip or a pull-back which will inevitably occur at some point after a run before entering into the stock.

Buying Stock on Dips and Pull-Backs – Conclusion

By knowing your favorite stocks ahead of time and keeping some cash on-hand and ready to buy, you can diligently track the price of each stock and wait for a pull-back to enter or increase your position in your favorite stocks. The key is being patient enough to get the stock at a good price dip and making sure the price dip is a temporary set-back rather than a deserved price drop due to a poor earnings outlook or changing economic conditions for the sector.

Anyone can go on Fiverr to browse the categories of gigs being offered and you can sign up for an account and post your own gigs as well. The traffic to the site is very high – some gigs have already been ordered 1000s of times.

At just 5$ a gig and with a lack of commercial interest driving many of the gigs, it may seem like there is not much room for profit here. However, there are a few intelligent ways you can use Fiverr to generate a decent profit stream online.

More specifically, there are three primary methods to use Fiverr to actually make significant money online: as a paid lead-gen service, as a sales platform, or as a reselling platform. I will go over all of these below.

Using Fiverr As a Lead Generation Service to Make Money Online

Some of the most successful people who make money on Fiverr use Fiverr not to make money but instead generate leads. For example, if you are a graphic designer, you could undercut your rates and offer to make someone a logo for their website for $5.

At rates like these, you are obviously undercutting yourself, but good graphic designers can be hard to find. It would not be too far of a stretch to suggest that a 5$ logo or banner customer could be pleased enough with your work to inquire about your normal rates for making a full website. These sorts of things happen all the time.

This goes for all sorts of gigs that require specific talents. Another popular one is voice-overs, where radio DJs and the like offer to do short (typically 30 seconds) worth of broadcasting for $5. While recording the file and sending it over cuts down on the dollars per hour you can earn, customers who like your work could then hire you to do a much longer (and expensive) reading.

I know not everyone is a graphic designer or radio DJ, so our next two methods will be much easier for anyone to reproduce to make money online.

Using Fiverr as a Sales Platform

One way to make Fiverr work for you is to find a high-volume, low-profit margin business model and outsource the work overseas. Of course, that is easier said than done. Let’s break this down in a step-by-step fashion.

First off, any job which is going to make money on Fiverr is going to have to be high-volume and low-profit given the 5$ gig cost. You are only going to make so much per gig so you need to be sure that whatever you are selling is getting a lot of transactions if you want to make money.

I have noticed that some of the users with the highest amounts of work done tend to be selling services which are actually used commercially. In particular, article writing seems to be perhaps the most popular type of job on Fiverr. Website owners and internet marketers buy cheap articles off Fiverr to run on their blogs or for new niche websites.

The reason these sell so well is that most buyers tend to buy more than one article; instead of just one, they may buy anywhere from 5-30 articles at once to set up a new niche website or to have content for the next month for their blog.

One common thing to do is to sell 1 750-word article or 2-400 word articles for 5$. This may seem like an extensive amount of work to do for such little pay, but when you consider the power of outsourcing, it can be made profitable.

If you are not familiar with outsourcing, you can get decent writing from the Philippines (as they are native English speakers) for very cheap. As of 2009, according to their official website, the average family (not individual, but family) income amounts to about $4800 US dollars annually.

Given the income disparity between the Philippines and other English-speaking countries, those looking to work from home in the Philippines has exploded. This is not surprising considering online writing jobs often pay much more than advanced careers in the Philippines.

It is very easy to hire writers on oDesk while the business is just getting started. You can find writers who would do gigs which cost around 5$ on Fiverr for about 3$ on oDesk and have them work on a per-article basis. Simply post the exact copy of your gig on oDesk and offer 3$ per article instead of 5$ and you will be surprised by how many offers you get.

Once you get 10 topics or so, send them over to your new virtual assistant and then deliver the completed articles and you will make 2$ per gig just for being an intermediary. As people will often order 5+ gigs at once when it comes to article writing, sending a few emails can result in $10-$50 earned rather than just 2$. This is especially the case as you accrue positive feedback and your reputation grows on Fiverr.

As you get more business, you can make a move to hire someone full-time. One good site for finding such workers is onlinejobs.ph. You can browse by employee and read hundreds of profiles of would-be workers who list themselves as English writers. Their salary requests range from ~$240-$400/month to work full-time, which is quite good when you remember the average family income is only about $400/month total.

What you would then do with Fiverr is offer to sell articles for $5 per gig and then send the article topics to your writer in the Philippines each day. Based on standard work rates, about 1 hour of writing could be 1 5$ gig completed. If you are paying your worker about 3$ per hour, you could be making about 15$ per day per worker simply by sending out an email in the morning and sending out the completed work at the end of the day. This takes all of a few minutes and could ultimately make you a few hundred extra dollars per month.

Of course, you could scale this over time by hiring another worker, or better yet, move to your own site where you can charge more per article.

Promoting Your Business

The trick to getting this strategy started is to get people actually ordering your service in the first place. In order to do this, you may need to do some outside advertising for your gig. The easiest way to do this is to find a forum related to your niche and put your service in your forum signature.

For article writing, you put a link to your gig in your signature on internet marketing forums, as these are the sorts of places where people who want to order article writing services tend to hang out.

Using Fiverr as a Re-Seller Platform

While the above scenario is viable (people do it all the time), especially when scaled up, I think it is a lot more viable to make extra money online through Fiverr by being a middle man for more lucrative contracts.

As mentioned above, professional graphic designers and radio DJs regularly produce quality graphics, logos, banners, and voice overs for just 5$. Why do they sell this typically expensive work for such a low price? Simply because they do not know how or where to market their services!

As I established in an earlier post, oDesk and Elance make great places to sell services of all sorts, particularly professional ones like graphic design and voice overs. You have a cheap labor source on Fiverr and an easy retail outlet with oDesk and Elance. This is where the profit lies.

You can log onto oDesk and Elance and re-sell the services of certain Fiverr gigs. Of course, you want to test the quality of the Fiverr gig before re-selling the work (it is only 5$ to try)m, as you need to know exactly what you are selling. Once you find a good graphic designer or voice-over artist, you can get to work.

When looking on Elance, people often pay 50$ or more to get a simple website header or logo designed. These same services are only 5$ on Fiverr. You can bid on a simple graphic design job on Elance for 50$, win the bid, then pay someone on Fiverr to do the project for 5$ or 10$, depending on how their gigs are set up You can then send the completed files over on Elance and collect your profit.

You make a huge profit margin just by being the intermediary. Maybe in time more people will catch on, but right now there are plenty of people trying to sell graphic design for 5$ on Fiverr and plenty of companies trying to buy graphic design for hundreds of dollars on Elance. Someone has to make the sale, and it might as well be you.

Maximizing Fiverr Profits with Return Customers and Upsells

If you decide to try to make money by the first two methods as discussed above, getting return customers and using upsells are going to be key to your Fiverr business.

To address the return customers portion, no one gets rich on Fiverr by selling 1-time joke gigs but instead by selling things that their customers are going to want to order again. This is why I suggested the article writing service; people who need articles now are likely to need them in the future.

Upsells refer to selling something additional or an extra service during the ordering process. On Fiverr, you will notice on some gigs that there is a “Fiverr Plus” option where you can add-on things to your gig order at an additional price, which sometimes are much more than 5$.

For example, if you were running an article writing service, your Fiverr Plus upsells might be a longer article or a high-quality article which is outsourced to North American or UK English speakers (which you can outsource to on oDesk). You might charge 10$ for such an article and pay someone $7-$8 on oDesk to complete it.

How to Make Money Online Through Fiverr – Conclusion

Fiverr presents an interesting way to make money online, but if you want to make a consistent profit and a decent hourly rate, you either need to be gathering leads to market your customers more expensive services, outsourcing the work overseas and acting as an intermediary, or re-selling professional services offered on Fiverr to companies which are paying more money.

Very few individuals make any significant amount of money on Fiverr without a little outside help. Find a way to get someone else to do the work or sell your customers more expensive services and you can make this site worth your while.