"A reader writes" What does a stock split mean?


Hello Friends! Thanks again for stopping by. I got another email from Jason M. who writes:

Hey Bob,

As the one person in the world of advice that doesn't
make me feel bad for asking dumb questions, I would
like to throw yet another one your way.

What does a stock split mean and how does it effect a
stock?

Thnx again for everything.
J.

Well Jason, I was always told there are NO dumb questions, and I believe that is the case. Many of us have assumptions about our understanding of things that may be totally off base, so if you are not sure about something, never hesitate to ask! And you KNOW I like to get emails!

Basically, a stock split comes in the form of a "dividend." That is, a distribution to current stock holders of additional shares of stock. Sometimes, and I will comment on this in a second, the split is what is called a "reverse split" where actually shares are "redeemed" from shareholders so there are actually LESS stocks outstanding. But the stock distribution, or additional shares, is the usual route.

Let me try to explain this with a simplified example. Let's assume we have a company that makes widgets and has ten shares outstanding. In other words, anyone who has one of the shares owns 10% of the company. For argument's sake, let's say that the world figures this company is worth $100. That is, if you could buy all of the ten shares, it would cost you $100. Thus, each of the ten shares would be worth $10. The total value of the shares, calculated by multiplying the price/share by the # of shares would be $100 or as we like to refer to it, the "Market Capitalization" of this widget company is $100. I hope you are following me!

Next, let's say that the CEO of the company and the shareholders decide that they wold like to have more people have shares of stock....and that they would like the stock pricer to be cheaper so more people could own shares. What they decide to do is to distribute an additional 10 shares to existing shareholders. This doesn't actually make the company worth any more! They are just sending out pieces of paper, stock shares, to each shareholder. In fact, each shareholder would be entitled to one additional share of stock. Thus, there would be a total of twenty shares in our example, and since the company presumably is not worth any more, the value of the company would be $100/20 or $5/share.

This is what happens in real life. With a 2:1 stock split, this means that for each share you had previously, you will now have two shares. This is also called a 100% stock dividend. Other types of split are also possible. For instance, a 50% stock dividend means that for every TWO shares you have, you will now have THREE or, it may also be referred to as a 3:2 split.

Sometimes when stock prices get incredibly cheap, into the pennies sometimes, the company may choose to do a REVERSE stock split to increase the price of the stock. How does that work? For instance if you have a 1:5 split, a reverse split, you would be issued a new share and five old shares would become worthless. The price of the stock would presumably also increase five-fold not because the company was WORTH any more, but just because the SAME value of the company was now divided among FEWER shares.

PHEW....I didn't mean to go on so long. I hope you followed my discussion. I know you had another question, and I will get to that shortly!

Thanks so much again for inquiring and I hope that my answer was helpful to you! If you or anyone else has any other questions, I would be happy to try to give you an explanation (as long as I understand the answer!)...just email me at bobsadviceforstocks@lycos.com

Bob

April 29, 2004 Fisher Scientific Intl (FSH)

Hello Friends! It is late again and I just want to squeeze in a quick post. I mean if you guys weren't stopping by, then I wouldn't feel the NEED to post...but if somebody is going to read this stuff....well then somebody (me) is going to have to WRITE it!!! jk Anyway, as always, PLEASE do your own investigation of all of the stock information I write on this website as I am an AMATEUR investor, passionate at that, and you really need to check with your investment advisors to make sure that the investments discussed are appropriate, timely, and a good decision for you to make.

I came across Fisher Scientific (FSH) earlier today and really meant to post it earlier but one thing led to another...you know how that is! Anyhow, FSH had a nice day today in an otherwise mediocre market, closing at $58.60, up $2.06 (3.64%) on the day. According to the Yahoo "Profile", FSH "...serves science through more than 600,000 products and services that it offers to more than 350,000 customers located in approximately 145 countries." Yahoo goes to point out that Fisher "...primarily serves the scientific research, clinical-laboratory and safety markets." I do NOT own any shares or have any leveraged position in this stock.

What drove the stock higher, as is the case with most of our stocks this time of year, was an earnings report that was released after the market close yesterday. Sales for the first quarter 2004 ended March 31, 2004, increased 21% to $1.01 billion from $.83 billion the prior year. Even EXCLUDING the positive effects of the exchange rate, sales still came in with an 18% growth to $983.5 million. First quarter net income came in at $34.6 million or $.51/diluted share compared to a net loss of $(0.9) million or $(.02)/diluted hsare in the first quarter of 2003.

Looking at the "5-Yr Restated" financials from Morningstar.com, we can see that revenue has grown steadily from $2.5 billion in 1999 to $3.6 billion in the trailing twelve months. Earnings have been a bit erratic but have grown from $.55/share in 1999 to $1.29/share in the trailing twelve months.

Free cash flow has been solidly positive and slowly increasing with $119 million in 2001, $115 million in 2002, and $138 million in 2003.

Balance sheet-wise, FSH has $83.8 million in cash and $927.0 million in other current assets, enough to cover the $648.5 million in current liabilities AND make a dent in the $1.6 billion in long-term liabilities.

If we look at "Key Statistics" from Yahoo, we can see that the Market Cap is $3.74 billion. The trailing p/e is rich at 45.25, but the company is expected to continue its rather fast growth so the forward p/e (fye 31-Dec-05) is only 17.60. The PEG is at 1.40 which isn't bad and the price/sales is even nicer at 1.01.

There are 63.79 million shares outstanding with 58.00 million of them that float. Currently there are 7.58 million shares out short, representing 13.08% of the float, or 4.782 trading days. In my opinion, whenever we get over 1 or 2 trading days, the amount of the short interest becomes increasingly significant, as the risk of a 'short squeeze' increases.

No cash dividend is paid and the last stock split was a 5:1 reported on Yahoo in April, 1998.

How about technicals? Looking at a "Point and Figure" chart, we can see that FSH was trading sideways between 2001 and early 2003. Then in November, 2003, FSH broke through a resistance level at about $32 and has traded higher rather strongly since.

What do I think? I actually like this stock a lot. The p/e isn't too bad in light of the growth, and the PEG is reasonable. They are cash flow positive with a solid balance sheet. The only thing holding me back (lol) is the fact that I DON'T have any CASH!!! My account is in margin in a correcting market, and I am in the "raise cash" mode....at least insofar as new investments are concerned. I will wait until I sell a portion at a nice gain before adding another position.

Thanks so much for stopping by and visiting. If you have any questions, comments, or words of encouragement, PLEASE feel free to email me at bobsadviceforstocks@lycos.com

Bob

April 29, 2004 INAMED (IMDC)

Hello Friends! The market SEEMS like it may want to go a little higher in here...but I am not holding my breath. As always, please remember to do your own work on these stocks on the website, and consult with your investment advisor as I am an amateur investor who likes to talk about stocks...and only your investment advisor knows if these selections are timely, appropriate, or even wise for you!

I came across INAMED (IMDC)today as I was looking at the market movers. I do not have any shares or leveraged positions in this stock. As I write, IMDC is trading at $58.03, up $2.85 or 5.16% on the day. According to the Yahoo "Profile", INAMED "...has three principal product lines: breast aesthetics, consisting primarily of breast implants and tissue expanders sold largely for use in plastic and reconstructive surger; facial aesthetics, consisting primarily of collagen and other dermal fillers sold largely to dermatologists and plastic surgeons, and obesity intervention, consisting of products for use in treating severe and morbid obesity."

What drove the price of the stock higher today, was an earnings report released yesterday after the close. For the first quarter 2004, ended March 31, 2004, INAMED reported sales increasing 20% to $90.8 million from $75.5 million last year, diluted earnings up 40% to $.49/share compared to $.35/share last year. These are pretty nice numbers!

If we look at the "5-Yr Restated" financials on Morningstar.com, we can see that IMHC has grown its revenues from $189.3 million in 1999 to $332.6 million in the trailing twelve months.

Morningstar shows an erratic earnings record with EPS dropping from $1.35 in 1999 to $.64 in 2001, but increasing since then to $1.51 in the trailing twelve months.

Free cash flow has been solidly positive and increasing from $14 million in 2001 to $63 million in the trailing twelve months.

Balance sheet? Looking at the numbers on Morningstar.com is reassuring with $80.5 million in cash and $131.6 million in other current assets as opposed to $80.2 million in current liabilities and $69.3 in long-term liabilities.

Valuation? Looking at the "Key Statistics" on Yahoo we can see the that the trailing p/e is 35.11 but the PEG (5 yr expected) is nice at 1.25. Price/sales a bit rich at 5.88.

There are 35.44 million shares outstanding with 28.80 million of them that float. There are quite a few shares out short; Yahoo reports 1.88 million shares representing 6.51% of the float or 3.933 trading days. We may be in the midst of a little "squeeze" on these short sellers.

No cash dividend is paid and the last stock split was just a few months ago: a 3:2 split in December, 2003.

Technicals? IMDC has a nice "Point & Figure" chart. The stock broke through a resistance level in October 2003 at about $19.50/share and has headed strongly higher since.

Overall, I like this stock a lot. In fact, if I can justify it, I might be a purchaser of stock in this company. But, I would REALLY like to wait for a sale of a stock on a GAIN before dipping my toes any further into equities. Thanks so much for stopping by! If you have any questions, comments, or words of encouragement, please feel free to comment ON the blog or email me at bobsadviceforstocks@lycos.com

Bob

"A reader asks" How about SCHN and ABTL?

Hello Friends! A pretty DISMAL day in the market wouldn't you say? As ALWAYS, please remember to do your own investigation on all stocks on this website before taking any actiona and please consult with your investment advisor to make sure that all of your decisions are appropriate and timely for your particular needs.

It is always nice to get an email. Especially from a reader who stops by regularly. As I always warn, I will be posting your questions in the blog with just the initial of the last name.

Terry H. writes:

Bob,
I would like to start off by saying "thank you"! I
visit your site often, and appreciate the step-by-step
explanations to your picking methodology.

My question pertains to 2 of your picks from the past:
ABTL (now off 25% from the date of coverage) and
SCHN (off almost 20%)

Do you see this as a discount, or were the
fundamentals really that much "askew"??

I often combine your breakdown of the financial
characteristics with my desires to identify demand of
an innovative product.

Autobytel seems to be be moving in the right direction
through its attempts to minimize the unpleasantness of
dealing with car salesmen and catering to a more
bargain-minded public.

Once again, thank you for sharing your addiction to
the market!
Terry

Terry, let me try to respond to these stock questions one by one.

Autobytel (ABTL) was posted on Stock Picks on 3/17/04 at a price of $12.93. ABTL closed today at $9.40, this is down a large $(3.53) or (27.3)%. If you had purchased this stock at the original price, I would hope you would have unloaded this after the stock hit your loss limit, as you probably know, I am at 8%. However, let's look at the news and see if we can figure out anything!

By the way, I do NOT own any ABTL, but DID purchase some SCHN and stopped out after it hit (and passed) my 8% stop.

In a news story on Yahoo, on 4/23/04, it is reported how ABTL shares dropped 24% on soft ad revenue. Basically, as the story states:
Shares of Autobytel Inc. (NasdaqNM:ABTL - News), a Web-based car-buying service, plunged 24 percent on Friday, a day after the company reported quarterly earnings that were below Wall Street expectations and said advertising revenue softened in the latest quarter.

Clearly, much of the market's movements are based on expectations. Unfortunately, disappointments are punished severely, and surprises are rewarded out of proportion to the news. The market always does more than is indicated imho. I have found that these kinds of suprises are completely unpredictable for the amateur investor. All we can do is try to ride out the storm if we have profit cushions and feel that fundamentals are intact, or sell if we hit out loss limit point. This is why we cannot just find a single stock, but rather must spread out our risk with a whole portfolio of stocks of similar style. I use 25 positions...but whatever # you feel appropriate is fine!

Question #2: How about SCHN? I posted SCHN on Stock Picks on 4/2/04 at a price of $37.62. I also purchased 300 shares of SCHN the same day at a price of $37.45. Unfortunately for me, I sold these same shares six days later on 4/8/04 at a price of $34.38 for a loss of $(3.07) or (8.2)% in just under a week! I hate it when I lose money quickly like that!

However, SCHN closed today at $28.85, down from our pick of $37.45 by $(8.60) or (23)%. You can see how wise it may be to take a quick loss than to hold on for a recovery! Sometimes these stocks bounce back...but then again...

The IRONY of all of this (is there a PUN in there somewhere?), is that Schnitzer Steel TODAY, announced increased expectations for the 3rd quarter upcoming. They ALSO commented optimistically on the upcoming quarter. Then WHY is the stock down?

I am starting to realize that my stock picking method works better with companies that depend on some type of manufactured product and its continued increased penetration in the marketplace rather than the price of a commodity. I did NOT have good luck with Pogo Producing (PPP) either, even IF fundamentals were nice. And Lord knows, SCHN has good numbers.

What is driving this stock is the China connection and the associated skyrocketing price of scrap metal. This stock has dropped along with the scrap metal price (I assume) because China is now jawboning its own industry and talking down its uncontrolled growth. This influence of the market is far GREATER than the underlying business.

So in conclusion, I do NOT try to be smarter than the market. I do not think harder than the other analysts nor do I claim to be smarter. I pick stocks when the market rewards them with strong price moves AND they have great fundamentals underlying their stock price. I sell stocks when the market either hands me a loss or hands me a terrific gain.

A very wise investor once said it is never wise to fight the tape. When stocks drop on me after I have purchased them, I step aside. However, I hope to have sufficient GAINS in my investments that I can ride out any short-term corrections and avoid going in and out of equity.

I very much hope that answered your questions.

Thanks again for writing and being a loyal reader. Your words of encouragement are very much appreciated. If you have additional questions, or if other readers have questions, please email me at bobsadviceforstocks@lycos.com

Bob

"Trading Transparency" MMSI

Hello Friends! Thanks so much for stopping by! Remember to do your own investigation of all stocks discussed on this website and consult with your investment advisor to make sure investment decisions are timely and appropriate for you!

I have been watching my Merit Medical Systems (MMSI) give back the gains we had accrued the past year. Latest earnings were just fine IMHO, but the stock price continued to drop. Moving into the loss area this morning, I sold my 200 shares at $16.48. These shares were acquired 9/8/03 at $17.49, so I had a loss of $(1.01)/share or (5.8)%. This is BEFORE I hit an 8% loss, and would rather not have had ANY loss on this one as we had already taken a profit. I actually sold 50 shares of an original 250 share purchase on 11/24/03, with a $276.93 gain, so overall we are about even on that one.

Anyhow, I do not hang onto stocks that are declining in price! Thanks again for stopping by. If you have any questions, comments, or words of encouragement, please feel free to email me at bobsadviceforstocks@lycos.com

Bob

April 28, 2004 Trimble Navigation (TRMB)

Hello Friends! I can tell you I MUST have some kind of blog-addiction. I do not know if there are any suitable self-help books, or 12 step programs to deal with it but here I am, sitting at my computer at 4 minutes after 12 midnight, scrambling to put in a post on a stock. Am I nuts or what?

Anyhow, PLEASE remember to do your own investigation of all stocks discussed on this website and please remember to consult with your financial advisors before making any investment decisions to make sure they are suitable, and timely for you!

I came across Trimble earlier today (yesterday?). TRMB had a GREAT day today, closing at $25.98, up $3.23 on the day or 14.20%. According to the Yahoo "Profile", Trimble "...provides positioning product solutions to commercial and government users in a large number of markets."

What drove TRMB higher today, as is the case with almost all of the stocks we look at, was earnings. In fact, Trimble reported 1st quarter 2004 results this morning. Revenue for the quarter came in at $156.5 million, a 23% increase over last year's $127.3 million. Net income rose to $12.8 million or $.24/share, a 100% increase from last year's $5.4 million or $.12/share.

Looking at the "5-Yr Restated" financials on Morningstar.com, we see that revenue has grown smartly since 1999 when TRMB had $271.4 million in revenue. This has increased ALMOST uninterrupted (except for a small drop in 2002) to $540.9 million in the trailing twelve months. Earnings/share which dropped from $.55/share to a loss of $(.63)/share in 2001, has increased each year since then to the current $.77/share in the trailing twelve months. Free cash flow has also been strong increasing from $19 million in 2001, to $26 million in the trailing twelve months.

What about the balance sheet? Morningstar.com shows that TRMB has $45.4 million in cash and $184.2 million in other current assets, which is more than enough to pay off BOTH the current liabilities of $96.7 million and the long-term liabilities of $100.0 million. In other words, the balance sheet, in my humble opinion, looks great!

How about valuation? Looking at "Key Statistics" on Yahoo.com, we find that the market cap is a mid-cap $1.31 billion with a trailing p/e of 34.27. However, the anticipated growth is substantial enough that the forward p/e (fye 2-Jan-06) is 21.12. The PEG, a measure of the p/e in proportion to the growth rate is fairly reasonable as well at 1.33, and price/sales not too bad at 2.13. I always prefer those numbers closer to 1.0 for a dirt-cheap stock, but these ratios do not seem to be overly inflated to me.

Currently, Yahoo reports 50.54 million shares outstanding with 49 million of them that float. There are currently 2.34 million shares out short as of 3/8/04, which is pretty considerable representing 4.628 trading days but only 4.77% of the float. We may be in the midst of a bit of a short squeeze with the current run up in price. It is interesting, although I am not sure it is relevant, that when I posted TASR at $29, the short ratio was over 5.0....so the whole thing DID start with a bit of a squeeze in THAT case.

No cash dividend is paid, and TRMB did JUST have a stock split, having split 3:2 in March, 2004.

What about "technicals?" Taking a look at a "Point and Figure" Chart on stockcharts.com, we can see that TRMB was actually heading slightly lower during 2002, and then broke through a resistance level in January, 2003, and has headed steadily higher since. The graph looks nice to me.

What do I think? Well, it seems that there is little NOT to like with this stock. The recent earnings and revenue growth are good and consistent with the past five years. The earnings have been a bit erratic, but have consistently improved at least the last 3 or 4 years. The free cash flow is reassuring and the company has a great balance sheet. The p/e isn't cheap, but then again the company is anticipated to continue its rapid growth and the PEG isn't too bad either. In summary I like this stock just fine. In fact I would even buy some shares, if this was a possibility.

Now you know I have to sit on my hands until I can sell a portion of one of my holdings at a gain...as I have done from time to time....just that right now is NOT the time!

If you have any comments, questions, or words of encouragement, please feel free to email me at bobsadviceforstocks@lycos.com

Bob

"Seven Months Ago" A longer term view examining the week of September 29, 2003

Hello Friends! Well from the previous post, you can see that the past seven weeks were NOT very kind to my picks...but seven months ago, especially with one selection, our picks were on fire! Remember, to PLEASE do your own homework on all stocks selected, use your investment advisors before making any decisions, and always remember that past performance is NO GUARANTEE of future performance!

The week of September 29, 2003, was a week when I posted six selections. Of these stocks, I purchased only one in my "Current Trading Portfolio": AnnTaylor, a stock which I still own and have sold a portion for a gain already.

On 9/29/03 I posted SFBC International (SFCC) on Stock Picks at $30.25. SFCC closed on 4/23/04 at $31.90 for a gain of $1.65 or 5.5%.

Looking at the news for recent earnings to see if the company is STILL performing, SFCC should be reporting their earnings in just a day or two, but the last earnings report was their Fourth Quarter 2003 results which were posted on 2/17/04. Revenue came in at $33.6 million, a 46.5% increase over the $23.0 million the prior year. Net earnings for the fourth quarter increased 40.1% to $4.2 million compared to $3.0 million the prior year. On a fully diluted basis they came in a little less impressive at $.43/share vs. $.40/share the prior year. This less impressive result reflects an increase of 29.3% of average shares due to a November, 2003, share offering. Overall, this company appears to be doing just fine but I would watch closely at future share offerings to make sure their is no continued dilution of earnings.

On 9/30/03, I picked AnnTaylor (ANN) for Stock Picks at $32.14/share. (I also purchased some shares for my trading account shortly thereafter). ANN closed at $42.00 on 4/23/04, for a gain of $9.86 or 30.7%.

As I always like to emphasize, one of the BEST ways of assessing a retail stock in addition to the usual methods of revenue growth and earnings is to look at the "same store sales numbers". These numbers adjust for new outlets to examine the sales of existing stores compared to the prior year. Anything positive is always healthy and anything over 8 or 9% is great. On 4/8/04, ANN announced March Sales results which showed that for the five week period ended April 3, 2004, net sales increased 23.6% (!) to $170.8 million from $138.2 million the prior year. Comparable store sales were up 12.0%. These are great numbers. In addition, ANN went ahead and RAISED first quarter earnings guidance to $.54-$.56 from a range of $.47-$.49 previously estimated. It is almost ALWAYS bullish for a stock to have the company raising earnings expectations!

How about earnings for ANN? Last month, on March 9, 2004, ANN announced 4th quarter 2003 results. Total net sales were $448.7 million, up 27.4% from the $352.2 million the prior year. Net income came in at $31.5 million or $.65/share compared to net income of $16.1 million or $.35/share the prior year. These are GREAT results, in my humble opinion.

O.K. here was the STAR of the week. And the STAR of the entire blog. And I DID NOT BUY A SINGLE SHARE!....oh well, even a genius (lol) can make a mistake. TASER International (TASR) was posted on Stock Picks at $29.25. TASR had a 3:1 split on 2/11/04, making our posted price, adjusted for the split, now get this....drum roll please.......$9.75. TASR closed at $81.15 on 4/23/04 for a gain of...now get this....$71.40 or.....drum roll again.....732.3%. And I did NOT BUY A SINGLE SHARE. Yikes.

How about earnings? On April 20, 2004, TASR reported 1st quarter 2004 results. Revenues came in at $13.1 million, a 286% increase over 1st quarter 2003 results, and diluted earnings per share came in at $.24/share, an 700% increase over the $.03 reported the prior year. Hmmm, a tiny stock with great numbers. If you read the original post, you will see that everything was in line for a 'rocket' with great numbers and a LARGE short position at the time of the post....I am kicking myself now....and I DID NOT BUY A SHARE. oh well.

On 10/2/03, I posted UTStarcom (UTSI) on my blog at $35.23. UTSI closed on 4/23/04 at $29.15, for a loss of $(6.08) or (17.3)%.

How about earnings? On January 22, 2004, UTSI announced 4th quarter 2003 results. Net sales came in at $643.6 million, a 114% increase over net sales of $301.1 million the prior year. Net income came in at $66.4 million or $.52/share compared to $33.9 million or $.30/share, a 96% year-over-year increase in net income. These were great numbers! So even though the stock price has declined since the selection, I would still be interested in reading the upcoming earnings result for the first quarter 2004.

On October 3, 2003, I posted Genesis Microchip (GNSS) On Stock Picks at a price of $13.28. GNSS closed on 4/24/04 at a price of $19.72 for a gain of $6.44 or 48.5%.

On January 22, 2004, GNSS announced 3rd quarter 2004 results. Revenue for the quarter ended December 31, 2003, came in at $56.5 million up from $51.7 million the prior year. Diluted eps came in at $.01/share up from a loss of $(.22)/share the prior year. These were nice, if not impressive results. I would again await the soon to be announced 4th quarter 2004 results before endorsing this stock!

Finally, on October 3, 2003, I posted Bentley Pharmaceutical (BNT) on the blog at $15.69. BNT closed at $13.03 on 4/23/04 for a loss of $(2.66) or (17.0)%.

On February 26, 2004, BNT reported 4th quarter 2003 results. For the quarter ended December 31, 2003, total revenues increased 57% (29% adjusted for currency changes) to a record $18.1 million from $11.5 million the prior year. Net income came in at $.08/diluted share, compared to $.03/diluted share the prior year. These were nice results.

In summary, I posted six stocks during the week of September 29, 2003. Two stocks declined in price: UTSI (17.3)%, and BNT (17.0)%. Four stocks had nice gains: SFCC 5.5%, ANN 30.7%, GNSS 48.5%, and TASR 732.3%. The average performance, greatly influenced by TASR came in at a gain of 130.45%. This is a performance I cannot EVER hope to duplicate...well I can HOPE but I cannot, nor should you expect!

Thanks so much for stopping by! If you have any questions, comments, or words of encouragement, please feel free to email me at bobsadviceforstocks@lycos.com

Regards and have a great Sunday!

Bob

"How are we doing?" A look back on the week of February 9, 2004

Hello Friends! As ALWAYS, I am delighted that you took the time and decided to visit. Someday I should write a book about blogging. Well, first of all I suppose I should learn how to do HTML instead of all of this "fill in the blanks" posting....but there is always time tomorrow. Now REMEMBER to PLEASE do all of your own due diligence on ALL stocks discussed on this blog and consult with your financial advisors because I am an amateur investor just writing some ideas about investing and all decisions regarding YOUR financial situation should be made by qualified individuals who know your particular situation. Enough said!

Anyhow, it is Sunday, and I really need to get these reviews in so let's get on with it! One of the things I noticed about my postings on the blog the week of 2/9/04 was that I was getting SLOPPY. I mean can you believe it? I posted four stocks: Thor Industries (THO), Giant Industries (GI), Netsmart Technologies (NTST), and Cyberguard (CGFW). On TWO of them, check it out yourself (!), I forgot to post the price of the pick...well fortunately, I can look this up through Fidelity.com, so that's how I got the prices. I used the HIGHEST prices I could see for that day, so that would be the most conservative approach, without the risk of overstating our performance.

O.K. back to the blackboard..."I will write the prices on the posts, I will write the prices on the posts"....Honest, I will try harder!

So how did these stocks do these past ten weeks? Well on 2/10/04, I posted Thor Industries (THO) on the blog at $33.86. THO closed at $29.29 on 4/23/04 for a loss of $(4.57) or (13.5)%.

Next, I posted Giant Industries (GI) at $16.50 on 2/11/04. (This was one of the two stocks I needed to reconstruct prices). GI closed on 4/23/04 at $20.31 for a gain of $3.81 or 23.1%.

On 2/11/04, I posted Netsmart Technologies (NTST) on the blog at $17.60. NTST has been a weak performer and closed at $12.24 on 4/23/04 for a loss of (55.24)% (yikes).

Finally, on 2/12/04, I posted Cyberguard (CGFW) at $11.96. This was the other stock I needed to reconstruct the selection price. CGFW has also been fairly week since the post at $9.58 on 4/23/04. This represents a loss of $(2.38) or (19.9)%.

Quite frankly, this was NOT a great week or a 10 week period for my stock picks! We had since their selections, performance of losses of (13.5)%, (55.24)%, (19.9)%, and a gain of 23.1%. The average of these was a loss of (16.4)%. This was a mediocre week at best and you can see two things from this: #1) No stock selection is a guarantee of success over every type of market, #2)Why it is so important to avoid buying into weak markets over the short-term, #3)Why it is important to have sell points on stocks to limit your losses, and try to avoid selling stocks that are winners.

Thanks so much for stopping by! I will try to do the longer-term view, about 7 months out I believe, a little later today! If you have any questions, comments, or words of encouragement, please feel free to email me at bobsadviceforstocks@lycos.com Unless otherwise directed, I will try to answer your letters online in the blog so that I can share my response with our other readers!

Bob

April 23, 2004 Synaptics (SYNA) and "A reader responds"

Hello Friends! Thanks so much for stopping by and reading my BLOG. I almost get the feeling that I am getting to know some of you. I mean MAYBE there is something to what I am writing! As always, PLEASE remember that I am an AMATEUR investor...honestly...so do your own investigations of all of the stocks I discuss on my blog, and consult with your financial advisors regarding the timeliness and suitability of all investments discussed!

Jason M. responded to my post with:

here is another question.

i often feel overwhelmed by just the sheer amount of
stox out there to pick from. how do you go about
looking for the stox you choose?

J.

Well Jason, let me use an example from a stock today and see if I can walk you through my thought processes. Basically there are two methods of picking stocks...I will refer to them as a "top-down" as opposed to a "bottom-up" approach. Top-down investment decisions are made after you read something or heard somebody mention a stock, or even read a BLOG where a stock was described...and you decided that you were convinced about that stock and decided to invest in it. Bottom-up approaches are what I would call "screening" techniques. That is you first set up parameters, or characteristics of the kind of stock you would like to invest in then go to the market to see if any stocks out there fit you criteria. I hope you are following me.

My approach, I hope, is a "bottom-up" approach. I am looking for stocks with certain criteria. What are they? If you read through the Bob's Advice for Stocks homepage, you will see some of my criteria listed.

The first place I look for a stock to "pick" is the "Price % Gainers" which can be found on different online services. I like to use the Money.cnn.com site...but sometimes use the USA Today "% increase in Price" information.

Why do I start there? I have found in my experience, and I have NOT verified this statistically but this is my belief, that stocks that make large percentage gains in a particular day, MAY be stocks which later on go on to appreciate greatly. This also reduces my need to screen ALL of the stocks a given day. I restrict myself to the stocks on the lists of largest % gainers.

Today, I came across SYNA on the NASDAQ % gainers lists. Currently, as I am writing this note, SYNA is trading at $17.69, up $2.77 or 18.57% on the day. It does turn out that I do own some shares of SYNA, I am not sure how many quite frankly, in a managed account that I do NOT make decisions in regarding which equities should be purchased or sold. It is my policy, as much as I can remember, to point out whether I own shares in a stock or not. I really do wish to have full disclosure on this website, and that is why I also post my trading portfolio...and let you know about my brilliant trades and my flubs.

What is my next step? Well, first, I tend to start with the stocks over $10. Especially with my 8% sell point, a low-priced stock just has too much volatility and I tend to hit sell points quickly. Just my preference. Anyhow, I check with Yahoo.com to see if I can find a recent earnings report. I demand of my selections that the latest quarter earnings be a positive results AND that revenue has GROWN from the prior year. I believe that the BEST stocks, the HIGHEST QUALITY stocks, are the ones that growth their revenue each and every year (as much as possible) and ALSO grow their earnings.

Above all, this is NOT the only or even necessarily the BEST way to pick stocks. I do not know if this method even works long term (!). This is just the method that I am currently using. I believe it makes sense and I am trying to use it to make investment decisions.

One of the first things I look for is WHAT the company does. For this I find the "Profile" on Yahoo.com, which for SYNA, the Yahoo "Profile" for SYNA shows that they are "...a worldwide developer of custom-designed user interface solutions for notebook computers." Further down, they note that they are the ones that manufacture the "TouchPad" I believe for the IBM notebooks.

So back to SYNA. Yesterday, after the close of trading, SYNA reported 3rd quarter earnings. Over and over again I have found that if a company reports good earnings the stock price JUMPS. And that is what happened with SYNA. First what about revenue? Net revenue for the third quarter was $34.3 million a 31% increase over the $26.1 million the prior year. And earnings? They came in at $3.5 million or $.13/share, a 69% increase over $2.1 million or $.08/diluted share the prior year. These are GREAT results.

Next, I like to look a little longer term. I make these possible investment ideas "jump through hoops" before I post them! I have found that Morningstar.com is a WONDERFUL free service (the basic service) that provides me with a lot of information that I incorporate into this BLOG. On this site, the most helpful for me has been the "5-Yr Restated Financials"...which for SYNA is found here. (I assume you are sophisticated enough to know that all of these different color words are LINKS to other sites that I am referring to.)

The Morningstar site shows that first, the company has had great revenue growth more than just the most recent quarter. In fact, they have increased revenue fairly steadily from $29.8 million in 1999 to $118.2 million the trailing twelve months.

How about earnings? This is something I also like to check. Since data starts in 2003, I assume that SYNA started reporting these results as a public corporation since that date and in fact increased from $.31/share in 2003 to $.41/share the trailing twelve months (the TTM).

And Free Cash Flow. Why do I think that is important? I am old enough to remember the many dot.com investments that had LOTS of cash received in an IPO and didn't have any real earnings. They (analysts) used to talk about the "burn rate", that is how fast companies were USING UP their cash. I just want to make sure that a company I suggest, or invest in, is CREATING cash and not BURNING it up!

For SYNA, we can see the row of figures under "free cash flow" which shows NEGATIVE cash flow in 2001 of $(3) million improving to positive cash flow of $12 million in 2002 and $10 million in 2003, and $12 million in the trailing twelve months. This also gets a passing grade! Cash flow is positive and at least steady. It is even NICER if cash flow, in my opinion, is GROWING!

The next thing I look at is the Morningstar.com "Balance Sheet" figures. Simply put, does the company have a lot more ASSETS than LIABILITIES? And how about CASH? For SYNA, we can see that Morningstar is reporting $84.1 million in cash and $25.2 million in other current assets. But this is only significant when we contrast this with their liabilities, things they have to PAY out! For SYNA, their current liabilities are only $17.7 million (things they need to pay in the next twelve months) and the long-term liabilities are a nominal $2.3 million. The balance sheet looks GREAT!

Next place I like to look is VALUATION. That is, is the price REASONABLE, are you getting a good deal by buying this stock? For this I look under "Key Statistics" on Yahoo Finance section for stocks. I think if you explore Yahoo, you will see this along the left hand page of the quoe section. For SYNA, this is located here. And WHAT do I look for? I like to see what kind of Market Cap the company has...which is the value of the entire company found by multiplying the # of shares by the stock price. For SYNA, the market cap is $438.76 million.

Next, what is the p/e of the stock? That is how much price to you have to pay for a given earnings amount. For SYNA, this is 39.64, with a forward p/e of 30.10. This indeed sounds pricey, but a better indicator is what kind of price/earnings "multiplier" are you paying...when adjusted for growth. The closer the PEG or price/earnings/growth is to 1.0 the better. For SYNA, this PEG is at 0.99 which is GREAT. The price/sales is another ratio some people review, I do not find it as helpful but for SYNA, this is at 3.12. Usually, this is more helpful for "retail" stocks...like BBY, or COH, etc.

Finally, how many shares are outstanding? And what is the float...gives you an idea of the liquidity of the shares....for SYNA, there are 24.70 million shares outstanding and 17.50 million of them that float. And the Short Interest, which for SYNA is 1.34 million shares which represents 2.902 trading days as of 3/8/04....tells me how many people, traders, have sold the stock short...that is BORROWED shares speculating that the price would DROP. These shares need to be re-purchased at some point, and if the short interest is HIGH, then the possibility exists that a short "squeeze" could occur. That is, a RUSH to purchase stocks by speculators who borrowed shares to sell first...on the heels of GOOD news driving the stock higher. Do you follow?

Next, I like to see if the stock pays a dividend (NO)...this is an added bonus if present and see if any stock splits have occurred recently (again NO) for SYNA.

Lastly, I have started looking at some technicals, by checking the free charts on Stockcharts.com. I like the Point and Figure charts which give a feeling for the "ebb and tide" of the stock price. (did I say that right?)...For SYNA, this is found here. We can see that this stock, which was trading lower, broke through the red line we call the "resistance line" (the blue line is the "support line"), about June, 2003 at about a price of $12.5 and has traded higher since, although it appeared to be possibly breaking down in early March 2004. Overall the graph looks fine.

So this is what I do. PHEW....and do it quickly! When I have found a stock I like, I gather together the online pages, and start writing. Thank goodness I do not have writer's cramp! But I might get carpal tunnel instead! lolol. This stock looks GREAT. As I pointed out, I do happen to have a few shares elsewhere. I do not purchase any additional shares for my trading account until I sell a portion of an existing position at a gain...just one of my rules, and I plan on a maximum of 25 positions...I believe I am up to 22.

I hope this long-winded answer was helpful to you! If you or anyone else has any other comments, questions, or words of encouragement, please feel free to email me at bobsadviceforstocks@lycos.com

Regards!

Bob

"A reader writes" What about WNC?

Hello Friends! It sure was a breath of fresh air having a great rally in the market today. Hopefully, this will not be a short-term rally but more the start of something bigger...As always, please remember to always do your own investigation of all stocks discussed on this blog, and be sure to discuss your decisions with your investment advisor as I am just a fellow AMATEUR investor, and do not know what your personal situation is and whether stocks discussed will be timely or appropriate for you.

I always like to receive email, even when I was a kid, I found it exciting to check the mailbox and find out what had arrived! Around these parts, if you have any questions or comments, please feel free to email me at bobsadviceforstocks@lycos.com

Today, I got a nice note from Jason M. who wrote:

hey bob

thnx again for all the great info and adivce.

i was wondering what you think of WNC. they are a
local company in the city i live in. the recently
have recieved a grant from our town to educate thier
employees. they claim that they are selling mroe
trailers than they ever have and they announced the
other night that they have a plan in place to be out
of debt in the next 18 months. these all seem like
good signs to me, but then again i am the newb.

what sort of things do you look for in the stock that
you like?

First of all, let me repeat that I am not qualified to determine whether WNC is a good investment for YOU or not. That you will need to figure out. All I can do is let you know how it fits into the parameters I use to assess an investment...and I would be happy to do just that.

First of all WNC is Wabash National Corporation. They closed today at $28.50 up $.20 on the day or 0.71%. According to the Yahoo "Profile", Wabash "...designs, manufactures and markets standard and customized truck trailers and intermodal equipment under the Wabash, FreightPro, Articlite and RoadRailer trademarks."

You asked me about "what sort of things" do I look at in analyzing stocks. Well, the FIRST thing I like to do is find out how the company is doing right now. The best place in my mind is the latest quarterly report. Now if you can believe it, (I was surprised myself), WNC just released earnings a few moments ago! For the three months ended March 31, 2004, net sales for the first quarter were $222 million compared to $223 million for the same period last year. So this was OFF a bit. The good news is that Net Income was up strongly at $6.9 million compared to $1.4 million last year or diluted net income was $.23/share vs $.05/share the prior year. So the revenue was FLAT but the earnings were up nicely.

How about longer-term? The place I like to go for this is the free part of Morningstar.com. On this site, I like to check what is called "5-Yr Restated" financials. For WNC this is posted here. One of the things I see right away, is that revenue was $1.3 billion in 1998, peaked at $1.5 billion in 1999, and has dropped to $.9 billion in the trailing twelve months. The latest quarterly report has done NOTHING to convince me that this 'shrinkage' of revenue has turned around.

Earnings-wise, the company lost money in both 2001 and 2002, and is shown to have lost money in 2003. At least in the latest report, they are 'turning around'. Free cash flow which was $(76) million in 2000, improved to $0 in 2001, $99 million in 2002 and $34 million in the trailing twelve months. The balance sheet shows adequate if not excessive assets with $2.6 million in cash and $214 million in other current assets. There is a good amount of debt with $144.9 million in current liabilities and $283.2 million in long-term debt.

How about Valuation? For this I like to go to "Key Statistics" on Yahoo. Here we find that the market cap is at $767.08 million and that the forward p/e (fye 31-Dec-05) is only 12.45. Even with this low p/e the PEG is still high at 3.17. The price/sales is nice though at 0.86.

There are 26.92 million shares outstanding with 26.70 million of them that float. A lot of shares are out short; Yahoo reports 3.38 million shares as of 4/7/04, representing 12.65% of the float or 6.494 trading days.

No dividend is paid and the last stock split was a 3:2 in July 1994.

What about technicals? Well this stock was trading lower throughout 2000, 2001, and much of 2002, but the "Point and Figure" Chart for WNC shows it breaking through the resistance level in November, 2003, at about $7.5 and then trading strongly higher since that time.

Well what do I think? Thinking about all of the things I have writte, the recent quarter is a mixed report with flat revenue growth and a strong earnings report. Morningstar.com shows that the revenue peaked several years ago, and is still not recovering. Valuation-wise, the P/E is nice..at least going forward, but the PEG is steep at over 3.0. Technically the graph looks nice.

So where are we? This is not a stock that I would be picking for this BLOG. That does not mean it is not a good investment, and I would encourage you to make your own decision on this matter. However, I am looking for revenue growth, earnings growth, excellent balance sheet, and a nice graph. I hope that is not TOO much to ask!

Thanks so much for stopping by! I hope that was useful for you and that you feel free to email me with any questions you may have at bobsadviceforstocks@lycos.com

Bob