(B)(N) NYSE Pulp Fiction

Pulp Fiction
Courtesy: The Studios

Drama. We’ve been bushwhacked this week by the latest noisy “forecasts” from Goldman Sachs Chief Equities Strategist, Mr. David Kostin, which are headline news in the financial press and the news media of all sorts – if he’s right then about $200 billion is going to get chopped-off the “19 Most Overpriced Stocks” and maybe dumped on to the “40 Cheapest Stocks”, possibly as soon as Christmas, and wishing for some cheap “new money” from the retail investing public that needs its “wealth” to be managed.

But he’s not right and his dismal forecast has no meaning at all, and no purpose but to clear the shelves of the “old stocks” that have had a good run, and look tired, and make way for the new, neither of which are going away, regardless of the ambient stock prices; please see below and our Post “(B)(N) More Money, Please (REITS)” for more on “the stock market is always cheap”.

These “forecasts” are a pull-back to another era – a bygone era, gone for good – and all that’s left in some quarters is unsolicited “junk mail” and “come-ons”, and there’s a generation of newly-minted “investment analysts” who are waiting in the wings to fill those shoes – the wing-tips, so to speak – but they will need to bring their own “shoes” – new shoes – because it’s a slippery slope, and it’s they that have no traction (Bloomberg, October 7, 2014, Marc Andreessen on Finance: ‘We Can Reinvent the Entire Thing’ and our recent Post “(B)(N) BlackRock’s Broken Bond Market).

In fact, we are so disturbed about reports of “stock prices” in the media – like UFOs (Unidentified Flying Objects) – that the only stock price that is meaningful to us is the one that’s low enough that we might want to think about buying the whole company, and “fixing it”, if it can be fixed, so that the earnings return on our equity is a more competitive 15% to 30% per year and we have control over the payout rate according to our needs for investment growth and income, and not so much that of Wall Street.

Figure 1: (B)(N) GS The Goldman Sachs Group Incorporated – October 2014

And the situation in “wealth management” is so desperate that Goldman Sachs “can’t say” whether its own stock is “cheap” or “expensive” because it’s not on their wish-list.

But we can say that it has the lowest return on assets, the lowest return on the shareholders equity, the lowest return of earnings, the lowest dividend yield, and the highest price that it’s had in a year and, therefore, it must be one of the “most expensive” stocks on the street, but we’re willing to buy and hold it anyway because it’s trading above the price of risk, and for no other reason would we do that; please see Figure 1 on the right.

Figure 2: (B)(N) FSLR First Solar Incorporated

Another example is FSLR First Solar Incorporated which today is a $6 billion company (but $7 billion last week) which could have been had for $1.5 billion eighteen months ago and is now on the “checkout list” – it doesn’t pay a dividend, the return on assets is a paltry 5.6% and the return on the shareholders equity is a miserable 8%, and it has no debt to speak of, but we’re willing to buy and hold it merely because it’s trading above the price of risk, and the sun is still shining somewhere if not exactly in the canyons of Wall Street; please see Figure 2 on the right.

These contradictions are rampant (and we’ll show that below) because stock prices cannot be “directed”, or “predicted”, or “driven” for long, because there are as many reasons for a stock price as there are investors and their money – and we don’t need any “flyers” that don’t tell us that or how to deal with it; please see Exhibit 1 and 2 below.

The Stock Market Is Always Cheap

Exhibit 1: (B)(N) NYSE Pulp Fiction – “19 Overpriced Stocks” – Fundamentals

(B)(N) NYSE Pulp Fiction – Overpriced Stocks – Fundamentals

Figure 1.1: (B)(N) NYSE Pulp Fiction – Overpriced Stocks – Risk Price Chart

These nineteen companies now deemed “overpriced” were up next to nothing in 2012 (3.4%), but +49% in 2013 and a further +25% this year; they also paid $18 billion in dividends for a 35% return of earnings and a 1.9% dividend yield, in aggregate.

Is there a reason that they’re not going to do that this year, or the next, regardless of the stock price?

In our view, “priceless” is a better description, but that’s not our call. The managed portfolio of the (B)-class companies returned +148% (yes – 3 digits) last year and is up another +36% so far this year; please click on the links (and again to make them larger if required) “(B)(N) NYSE Pulp Fiction – Overpriced Stocks – Prices & Portfolio and Cash Flow Summary” for further details.

Exhibit 2: ((B)(N) NYSE Pulp Fiction – “40 Cheap Stocks” – Fundamentals

(B)(N) NYSE Pulp Fiction – Cheap Stocks – Fundamentals

Figure 2.1: (B)(N) NYSE Pulp Fiction – Cheap Stocks – Risk Price Chart

The portfolio of alleged “cheap” stocks was up +15% in 2012, +35% in 2013, and nothing so far this year; it also paid $18.7 billion in dividends last year, for a return of earnings of 34% and a current dividend yield of 1.5%, helped by “lower prices”.

If the stock prices increase, then the aggregate yield will go still lower, unless these companies ramp-up their earnings, or their payout rate, but, obviously, that’s the companies’ decision and has nothing to do with the stock prices.

The (B)-class portfolio in these same companies returned +15% in 2012, +86.5% in 2013, and is up another +20.4% so far this year; please click on the links (and again to make them larger if required) “(B)(N) NYSE Pulp Fiction – Cheap Stocks – Prices & Portfolio and Cash Flow Summary” for further details.

Enterprise Risk & Dividend Yield

There are five equations of state that tell us what a company is, and how that’s priced, but we don’t expect consistency, of course – and the companies that we buy and hold are still governed by the (B)-class –  but, on balance, investors have a pretty good nose for how to get what they want – they want income and capital gains, and will forego income (as dividends) if there is a likelihood that the capital gains will be better if the company has more money to “grow” – and in that context, we can develop arbitrage opportunities if the quality of growth is mispriced, either because there are no dividends, or the dividend yield is not consistent with that of near neighbors in the growth measure; please see Figure 3.1 and 3.2 below for how that applies to the NYSE Pulp Fiction.

The “Enterprise Risk” is the uptake rate of the “factors of production” (N*) into the shareholders equity (N) and, therefore, into the earnings, and we define it as the Enterprise Risk = 1 + log(N/N*); the factors of production are determined by Theory of the Firm which requires (with proof) that N* = GW* + “Fixed Assets (at cost)” + “Inventory”, where the latter are similar to their accounting meanings, and GW* is the “balance sheet worth of the trading connections” which we call the Coase Dividend.

The Coase Dividend, GW*, is also calculated in the Theory of the Firm and its value is GW* = (R+P)×E(α) = P×(1+α)×E(α), where α=R/P is the modality, and R is “what is owed to the firm”, and P are its total liabilities and “what the firm owes”; please see Exhibit 1 and 2 above for examples and the Theory of the Firm for the derivations.

Exhibit 3: NYSE Pulp Fiction – Enterprise Risk  and Dividend Yield

Figure 3.1: NYSE Pulp Fiction – Overpriced Stocks – Enterprise Risk & Dividend Yield

Figure 3.2: NYSE Pulp Fiction – Cheap Stocks – Enterprise Risk & Dividend Yield

For more information on the “Five Equations of State”, and an introduction to the terms that we have used here, please see our Post “(B)(N) Through the Looking-Glass“, and for the really hard rocks, the Theory of the Firm which is based on The Process.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.