Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As I always warn you, I am an amateur investor and cannot be responsible for your trades, so please consult with your professional investment advisors prior to making any decisions based on information on this website!
I was checking my mail the other day, and noticed I had a very nice email from Steve S. who wrote:
First off I want to say that I enjoy reading your blog everyday. You
definitely give some insightful advice for investors. You do a great
job with it and I just wish I had some capital to invest in the
market. I just graduated college in spring and recently got hired with
a full time career job at a bank. Unfortunately, I don't have too much
money saved up to start investing in the stock market right now. But I
really want to put some money into it and see how it turns out. My
main problem is that most of the stocks listed on your site are out of
my range to make a purchase. Do you think it is better to start with
out some smaller cap stocks and buy more shares or go with a larger
cap stock when I can buy fewer shares?
One stock that I have been watching recently which I really like is
SIRI. It has been on quite a rocky ride in the past few months but I
believe that XM and Sirius and satellite radio, in general, are going
to be the wave of the future. I mean, the price is right especially
when you look at XMSR at $35/share and SIRI hovering around $6/share.
Now that they also have some major contracts locked up the subscribers
should be jumping onto SIRI. Is it a good idea to buy on speculation
like this? I just don't know if I want to make my first stock market
purchase on a stock like this. But then again it could be a good stock
to hold onto for a year or two to see where it goes. Anyways, thanks
again for taking your time to do the blog. Please let me know if you
have any suggestions as to where I should invest.
Let me try to answer this email the best I can. First, thanks for the kind words on the blog. I hope that what I write in useful to all of you in thinking about stocks and what makes a good investment.
Your next question was about stock price and picking stocks. I want to clear up one thing first. I think you probably understand this but "small cap" and "large cap" have nothing directly to do with stock price. What you want to talk about is small stock price vs. large stock price.
Let me make sure that everyone else understands the difference. In a nutshell, the market capitalization of a given stock is what it would cost to buy every single share at its current trading price. That is, if we multiply the number of shares of a stock by its price, we get the "market cap".
There are a lot of different definitions of market capitalization. Looking through Google, I found a Market Cap Definition showing small-cap to be under $500 million of capitalization, Mid-cap to be between $500 million to $1 billion, and Large-cap to be above $1 billion. Lately, most definitions place this higher.
In fact, an "Investopedia" site defines Market Cap as follows:
Mega Cap - This group includes companies that have a market cap of $200 billion and greater. They are the largest publicly traded companies and include names such as Microsoft, Exxon, Wal-Mart, and General Electric. Not many companies will fit in this category, and those that do are typically the leaders of their industry.
Big/Large Cap - These companies have a market cap between $10-$200 billion. Many well-known companies fall into this category, which includes names like Yahoo, IBM and Citigroup. Typically, large-cap stocks are considered to be relatively stable and secure. Both mega and large cap stocks are often referred to as "blue chips."
Mid Cap - Ranging from $2 billion to $10 billion, this group of companies is considered to be more volatile than the large and mega-cap companies. Growth stocks represent a significant portion of the mid caps. Some of the companies might not be industry leaders, but they are well on their way to becoming one.
Small Cap - Typically new or relatively young companies, small caps have a market cap between $300 million to $2 billion. Although their track records won't be as lengthy as that of the mid to mega caps, small caps do present the possibility of greater capital appreciation--but at the cost of greater risk.
Micro Cap - Mainly consisting of penny stocks, this category denotes market capitalizations between $50 million to $300 million fall into this category. The upward potential of these companies is similar to the downside potential, so they do not offer the safest investment, and a great deal of research should be done before entering into such a position.
Nano Cap - Companies having market caps below $50 million are nano caps. These companies are the most risky, and the potential for gain is often relatively small. These stocks typically trade on the pink sheets or OTCBB.
So clearly there are a lot of definitions of market cap.
Now to get back to your question (!), is it better to buy a lot of shares of a lower priced stock or a few shares of a higher priced stock when investing? In my opinion, higher quality stocks are often higher priced! Thus, I would first try to determine whether the stock was the kind of quality I was looking for (using my parameters) and then buy my previously determined dollar amount, and then adjust the number of shares.
I do not think that your goal of looking for a particular price point for your stocks is a good idea...not from my perspective. As a small investor, you might want to check out the "Sharebuilder" website. I have no affiliation with them, I have never used their services, but I believe that you are able to make relatively small dollar purchases of stocks and purchase fractional shares. I started out investing years ago with Merrill Lynch, even though I am currently utilizing mostly Fidelity and Schwab. At that time, I could buy even $100 of a stock and purchase fractional shares. I would rather see a beginning investor buy fractional shares of a quality company than buy lots of cheaply priced penny stocks.
Finally, back to your question on SIRI. I am a big satellite radio fan, owning an XM radio in my old Jeep. My kids fight over which channel they want to listen to, while me getting to the age where news and commentary are what I enjoy, prefer to flip over to CNBC or CNN...or even Air America. But as an investment, that is, as they say, a "horse of a different color." I am not a big believe, a la Peter Lynch, just because a product is out there, and there is a lot of "hype" about a stock, that you should "chase" it. SIRI might turn out to be a great investment, and I could be totally wrong about that particular stock, so you should make up your own mind, but it just doesn't fit into my style of stock picks!
What do I mean? Let's briefly go over the usual steps I use when looking at a stock: first, latest quarter. On October 27, 2004 SIRI posted 3rd quarter results. The company widened it's loss at $(169.4) million or $(.14)/share from $(106.7) million or $(.11)/share the prior year. Now total revenue DID jump from $4.3 million to $19.1 million. But note, the company lost almost $175 million in order to have $19.1 million in revenue. This isn't my kind of company!
Looking at a "5-Yr Restated" financials on Morningstar.com, we can see the explosive revenue growth from $1 million in 2002 to $47 million in the trailing twelve months (TTM).
However, I am looking personally for stocks of companies that are profitable. And I would suggest that a novice start with those companies. SIRI has been EXPANDING its losses from $(97) million in 1999, to $(598) million in the trailing twelve months. On a per share basis, this doesn't look as bad because of the DILUTION of shares. DILUTION is a bad sign. That means the company is pouring out (issuing) new shares that dilute ownership.
In fact, SIRI had 24 million shares in 1999, increased in to 76 million in 2002, 827 million in 2003, and 1.2 BILLION shares in the trailing twelve months. Not a good sign imho.
The company continues to spend away cash with $(413) million in free cash flow in 2001, and $(337) million in the TTM. Not very promising!
Balance Sheet? Well, per Morningstar, they have $523 million in cahs and $47.1 million in other current assets, which should be plenty. But they have $165 million in current liabilities that need to be paid, and with their free cash flow of $(337) million, that means they have about another 12 months of operating cash until such time that they will need to borrow money or float some additional dilutive shares.
The whole picture is simply unattractive to me, no matter how much I like the concept of SIRI, no matter how much I think Howard Stern might bring in subscribers, it just is far too speculative for me, and probably isn't the place for a novice to start.
If you do buy some shares, good-luck! It might be a GREAT investment. Just not my style in any case. And I do NOT own any shares, nor do I have any short positions or puts or calls or anything like that. I am just giving you my take on this.
Thanks so much for stopping by! Please feel free to email me back at email@example.com if you have any comments or questions...and let me know what you decided to do!
And for all of the rest of you, have a great weekend and feel free also to email me with any thoughts, questions, or comments; I hope that my thinking is helpful in getting you all to think as well! Some of you may even help ME understand stuff :).