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Review of my 1998 Picks
Steve's Picks for 1998
1. RAIN 33 (moderate risk) SMEG-5 36%
2. MCRE 11 1/8 (high risk) SMEG-5 36%
3. PETC 24 (low risk) SMEG-5 25%
4. CSCO 55 3/4 (moderate risk) SMEG-5 21%
5. EGRP 23 (high risk) SMEG-5 48%
Prone to a biggie drop in 1998
AMZN 60 1/4
In whole, these picks were horrible. RAIN, MCRE, and PETC, my top three picks for 1998, dropped more
than 50% each. The stock I thought was most vulnerable to a huge drop, AMZN, exploded for a greater-than 900% increase. At least CSCO and EGRP fared well, each returning over 100%.
One thing is clear - the SMEG-5
is not the miracle indicator I anticipated it to be. (The SMEG-5 is a formula I devised to forecast the prospects of a stock, taking into consideration the stock price, the 5-year earnings growth estimates, and the
current year earnings.) I realize that the SMEG-5 is often a bad indicator for smaller stocks without a strong earnings growth track history. The phenomena that conflicts with the usefulness of the SMEG-5 is this: A
small growth company does not hit estimates, and the stock takes a hit. It takes a while for the analysts to revise the long-term earnings estimates downward. In the interim, the SMEG-5 is over-inflated, and it makes
the stock look especially attractive. But in fact, the stock, due to short term underperformance, is more vulnerable than ever.
This is what happened with RAIN, MCRE, and PETC.
On the other hand, I
believe the SMEG-5 is useful for assessing the attractiveness of big, successful companies, such as Cisco, Solectron, Home Depot, Intel or Microsoft. When the apparent returns indicated by the SMEG-5 shrink to too small
a value, then I will be deterred from buying the stock. On the other hand, when the SMEG-5 goes up for a high-quality company that has a decade or more of great performance, then the stock is attractive to me.
Some good stocks I began accumulating in 1998 include FedEx, Broadcom, and Starbucks. I liquidated Oracle and 3DFX due to what I perceive as reduced long-term growth prospects. The Lai Fund pre-1998 picks and holdings
that did extremely well in 1998 include Cisco, Intel, Microsoft, Home Depot, Walmart, Solectron, Biogen, and IBM. I did not buy more shares of these stocks for the most part, because they have seem pretty richly valued
all year long. But because they are very high-quality companies with great long-term prospects, despite their lofty valuations, I will continue to hold most of our positions in these companies through 1999.
My 1999 opinions
I am a new devotee to the S&P 500 for three reasons. First of all, the S&P 500 has performed extremely well versus alternative investment vehicles, like cash, bonds, gold, and real estate, over the long-term.
Secondly, investing in the S&P 500 does not take nearly as much time (tracking stock prices and making trades) and money (commissions and spreads) as does actively managing a portfolio of many individual stocks.
Thirdly, if the S&P 500 drops a lot, you do not have to take as much personal blame. Just blame the stock market, and ride out the bad times.
One note I should make about investing in the S&P 500, though.
Money I put into the S&P 500 is intended to remain there for 5 to 50 years. S&P Depository Receipts are a great way to invest in the S&P 500. The ticker symbol is SPY, and they are available on the AMEX. I
know the S&P 500 may seem overvalued by many indicators (P/E ratio, dividend yield, etc.) right now, but I still think they make a great no-brainer investment for the long term.I want to increase the S&P 500
holdings in the Lai Fund to between 20% and 50% of my domestic stock holdings.
In 1998, I had stocks that performed horrifically, and stocks that exploded. The stocks that did badly seem like poorly-run companies
in mostly so-so industries (RAIN, MCRE, PETC). The stocks that did exceptionally well seem to be great companies in good or great industries (CSCO, INTC, FDX, SLR, HD, WMT, SBUX). The lesson I learn from this: before
buying a stock, ask myself this -- do I think the company is a GREAT company? And go with my quick, gut reaction. If my gut response YES within two seconds of asking myself the question, then I think it is a great
company. If I think it is a great company, then I should consider buying stock in it. If I do not immediately think it is a great company, then I should stay away from it. I may not think it is great for two reasons.
Either I do not know enough about the company, or I know a lot about the company, and it seems short of greatness. Either reason provides enough cause to stay away from the stock of the company.
Here is a list of companies that my gut instinct tells me are great companies:
FDX CSCO SLR HD WMT SBUX YHOO MSFT BRCM GPS WFC MRK
Although I think YHOO is a great company, and have thought so for over a year,
I have not bought the stock, since it always seemed overvalued. Oh well, there goes my 25 bagger!
Here are a list of quality companies that my gut instinct does not tell me are great companies:
RAIN MCRE PETC EGRP ASND COMS SEG
All of the above not-so-great companies are in the Lai Fund. I will look for opportunities to sell most of them in 1999. Call me a masochist or a dummy, but I still like RAINs
prospects a lot, even though I do not think it is a great company. I will hold for now, but I will not invest more, because my gut says it is not great.
Here are my picks for 1999, along with their 12/31/98 prices:
Starbucks SBUX 56 1/8
Broadcom BRCM 120 3/4
FedEx FDX 89 3/16
S&P Depository Receipts SPY 123 5/16
On
the home page of Stockboy.com are my opinions on the holdings in the Lai Fund (ordered from largest holding to smallest holding as of 12/31/98). BUY means I like the stock now, and would consider buying it right away.
HOLD means I like the stock and think it is a good or great company, but the price is currently too high for me or the short-term prospects don't seem very favorable. REDUCE means either I like the stock but think the
prospects have taken a turn for the worse or the stock price seems to high to justify the stock's still-favorable outlook, and SELL means I don't like the stock's long-term prospects at all or am confused by the stock,
and I will look for an opportunity to liquidate the entire holding some time during 1999.
Internet stocks
Internet stocks exploded in 1998, and the closest
thing to a pure-play internet stock I bought the past two years was 100 measly shares of E*Trade at 18. It kind of upsets me to think that I could have made a lot of money in internet stocks like Yahoo or Amazon,
but at least I did not lose any money on other lousy internet stocks. A year ago, I told myself that it was not clear how profitable these companies would be one year from now, let alone five years from now. So I stayed
away from them because of the risk involved. I think I will continue to stay away from them, because I am an earnings-motivated investor, and until enough black numbers are posted in the earnings columns of their
quarterly reports, I will continue to stay away from them.
Rather, I have chosen to invest in more mature, profitable companies that benefit from the growth of the Internet. Four companies come to mind - Cisco,
FedEx, Microsoft, and Intel.
Also, I have a larger-than-investing philosophy about the Internet. I think as consumers, as users of the Internet, we are the clear winners. We can read news, check scores, buy
stuff, play games, read magazines, talk to each other, get driving directions, trade stocks, order pizza, promote our own companies and causes, etc...all for free over the internet. As long as my consumer benefits of
using the Internet increase, I do not mind possibly leaving money on the table by not investing in Internet stocks. I will still have an extremely happy and positive attitude about the Internet! And even if Amazon and
Yahoo stock goes up ten-fold next year (doubtful, since Amazon market cap is over $15 billion and Yahoo market cap is over $25 billion), I will be happy for them and their shareholders, since I use their services all
the time. It is just that personally, I still perceive too much risk in these stocks.
Online research tips
I use the Web for most of my investing
research nowadays. For example, instead of buying Fortune magazine, I just check their Web site every two weeks and read the articles related to investing. Likewise for other magazines like Worth or Smart Money. We
still subscribe to Forbes, but since they have one of the best investing magazines online, I read the articles online sometimes before I get the magazine.
From my experience, Silicon Investor and quote.yahoo.com
are the two best sites on the Web to read feedback from other investors on individual stocks. Also, I track my portfolio at my.yahoo.com -- very handy!
For a daily report of the stock market, check out the
evening news at the Motley Fool. Also, Fortune magazine has a pretty good daily summary, and for tech-specific roundups, visit Upside or The Red Herring.
I have found quote.yahoo.com to provide the best free
information on earnings estimates. Type in a ticker, retrieve a quote, then click on research. From the research page, click on detailed research to see a lot of earnings numbers, including five-year earnings estimates.
Most people like hot tips. My suggestion for good hot tips are to read the biweekly articles at Silicon Investor. Also check Microsoft Investor, Fortune, Smart Money, and Motley Fool for more good hot tips.
I have stock accounts at Ameritrade and E*Trade. In the past, I have chosen E*Trade, because they offered a lot of research and cheap commissions. But who cares about their research now...you can get most of it free
on the Web nowadays! Since Ameritrade commissions are much lower than E*Trade commissions ($8 for Ameritrade versus $14.95 or $19.95 for E*Trade), I prefer Ameritrade now. |
