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Posted by Martin July 08, 2024
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Started weekly options against MicroFutures /MES for weekly income


Let’s see how this trading goes from now on. I am trading all sorts of strategies and sending them all to our subscribers and you can pick up the one that works best for you. I trade regular futures, options against futures and now I am adding options against Micro-Futures for weekly income. The benefit of this trading is that it only requires $1,000 starting capital and it can be compounded to larger income.

At the beginning, we will be receiving a small income, only about $30 per week, but we will slowly scale it up. Once we double the amount allocated for this strategy, we will scale up. And we will also slow down based on the market conditions. If the market start flashing trouble, we may even stop trading and move to cash completely or trade bearish strategies instead.

 

What we will be trading to generate weekly income?

 

Mostly naked puts. Unlike other instruments, these will require $1,000 buying power. In a bear market, we may go to cash or trade naked calls. In neutral markets, we may go with Strangles.

 

Why not SPX strategies we traded before like Iron Condors?

 

The problem with SPX Iron Condors was that if a trade turned against us it was very difficult to adjust that trade. Many times, you have to close it for a loss. Some traders place a stop loss order but in bad market conditions, you can start accumulating losses before you give up and stop trading whatsoever. Micro-Futures allow to trade a naked put for only $1,000 (or less) buying power. SPX naked put would require $80,000+ buying power so you have to trade vertical spreads. Rolling spreads vs. rolling naked puts is a different story.

 

Here is our weekly income spreadsheet to start with

 

Here is a spreadsheet, let’s the journey begin. I hope, this will be way better than trading the SPX index (more capital efficient):
 

weekly income strategy

Good luck everyone!
 
 




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Posted by Martin July 04, 2024
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Why you should avoid trading debit options strategies


Recently, I came across a 1-1-2 options strategy (which is pretty much a ratio strategy). It is a debit strategy, and the explanation of the strategy is below. In this little post I will explain why I do not trade debit options strategies and why you should avoid them too.

Many investors, usually the new ones, who discover options make a huge mistake trading options as if they were stocks. And trading options as stocks never works. It may work for a while, mostly when the markets are bullish, but at some point, the strategy will stop working and losses can quickly pile up. Wallstreetbets reddit is full of people posting their “loss porn” indicating that many have lost all their savings.

So why you want to avoid debit options strategies?

One reason why you do not want to be buying options is time. Options are time sensitive instrument. They have expiration day and if your narrative was wrong, your option contract will expire worthless no matter how great your story was. Add to it that you must be right on the underlying move magnitude (the stock may move in your direction but you still can lose money) and of course, you must nail the direction.

Three aspects impact your option price: direction, time, and magnitude. Be wrong on one of those and you lose money.

The only exception to buying options is when hedging or protecting your other trades, for example when trading defined risk strategies. Otherwise, avoid trading debit options. You will lose money long term.

What is 112 strategy?

The 112 options trading strategy is a variant of the 1-1-1 options strategy, and it involves buying one call option, buying one put option, and selling two puts. Here’s a detailed explanation of how the 112 strategy works and its purpose:

Components of the 112 Strategy:

Buying One Call Option:

This gives the trader the right to buy the underlying asset at a specified strike price before the expiration date.
It provides potential for unlimited upside profit if the price of the underlying asset rises significantly.

Buying One Put Option:

This gives the trader the right to sell the underlying asset at a specified strike price before the expiration date.
It provides protection against downside risk and allows the trader to profit if the underlying asset’s price falls.

Selling Two Put Options:

 
debit options strategies
 

This obligates the trader to buy the underlying asset at a specified strike price if the buyer of the put options decides to exercise their rights.
The premium received from selling these puts helps to offset the cost of buying the call and put options.
It creates a neutral to slightly bullish bias because the maximum profit occurs if the underlying asset’s price remains above the strike price of the sold puts.

Strategy Purpose:

Income Generation: The premiums collected from selling two put options can generate income to help pay for the cost of buying the call and put options, potentially reducing the overall cost of the strategy.

Hedging: The put option provides a hedge against significant downside moves, while the call option offers unlimited upside potential.

Neutral to Bullish Outlook: This strategy is best suited for traders who have a neutral to slightly bullish outlook on the underlying asset. The strategy benefits if the asset’s price remains stable or increases moderately.

Profit and Loss Scenario:

Max Profit: The maximum profit is achieved if the underlying asset’s price increases significantly, as the call option will gain value, and the sold puts will expire worthless.

Max Loss: The maximum loss occurs if the underlying asset’s price falls below the strike price of the sold puts. The loss is limited to the difference between the strike prices of the bought put and sold puts, minus the premiums received.

Breakeven Points:

There are typically two breakeven points in this strategy:

The upper breakeven point is calculated by adding the net premium received to the strike price of the bought call.
The lower breakeven point is calculated by subtracting the net premium received from the strike price of the sold puts.

Example:

Let’s assume an underlying stock is trading at $100, and a trader sets up the 112 strategy as follows:

Buy one call option with a strike price of $110 for a premium of $2.
Buy one put option with a strike price of $90 for a premium of $3.
Sell two put options with a strike price of $85 for a premium of $1 each.

Net Premium Calculation:

Total premium paid = $2 (call) + $3 (put) = $5.
Total premium received = $1 + $1 (two sold puts) = $2.
Net premium paid = $5 – $2 = $3.

Breakeven Points:

Upper breakeven point = $110 (call strike) + $3 (net premium) = $113.
Lower breakeven point = $85 (sold put strike) – $3 (net premium) = $82.
 

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
~Mark Twain

 
 




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Posted by Martin July 01, 2024
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Tech Stocks Set to Skyrocket Amid Global Labor Shortage, Says Fundstrat’s Tom Lee


In a forecast that could reshape investment strategies worldwide, Fundstrat’s Tom Lee has predicted a seismic shift in the stock market driven by an impending global labor shortage. According to Lee, technology stocks are on the brink of a parabolic rise, potentially transforming the tech sector into a dominant force within the S&P 500.
 

Lee’s analysis centers on a looming shortage of about 80 million workers by 2030, a gap he believes will be bridged by advancements in artificial intelligence (AI). “I think AI is really addressing a global labor shortage of roughly 80 million workers by the end of 2030,” Lee said, emphasizing the critical role technology will play in mitigating this workforce deficit.
 

Currently, the technology sector comprises around 30% of the S&P 500. However, Lee projects this could surge to 50%, underpinned by the expanding influence and necessity of AI technologies. This projection was shared with clients in a video last month, shortly after Nvidia’s outstanding first-quarter earnings report which catapulted its stock to unprecedented heights.

 
dividend portfolio
 

Lee asserts that the current AI narrative is only just beginning. He posits that AI will significantly enhance productivity, thereby addressing the severe labor shortage. “The prime age workforce is growing slower than the total world population and by the end of the decade that gap is around 80 million workers. So unless there is a productivity boom which is what AI will do, it’s going to create a lot of pressure on companies or incentives for them to innovate,” Lee explained. This anticipated shift from annual wage spend to ‘silicon spend’ underscores the importance of technological investment in the coming years.
 

Financially, Lee estimates a staggering $3.2 trillion per year will be directed towards AI technology by companies aiming to counteract the labor shortage. Nvidia, a leading player in AI hardware, stands to benefit enormously from this trend. With annual revenues approaching $120 billion, the company is well-positioned to capitalize on the increased spending.
 

This isn’t the first instance where a labor shortage has propelled technology stocks to new heights. Lee draws parallels to historical periods of labor scarcity and subsequent tech booms. “Between 1948 and 1967 there was a global labor shortage and technology stocks went parabolic. And between 1991 and 1999 there was a global labor shortage and technology stocks went parabolic, so this is what’s happening today,” Lee recounted.
 

Addressing concerns about potential bubbles reminiscent of the dot-com era, particularly regarding Nvidia, Lee offered a comparative perspective. “Keep in mind Nvidia sells a $100,000 chip since it’s scarce, no one else really sells it. By contrast, Cisco sold a $100 router during the internet boom, and yet they got to a 100x P/E. I think Nvidia’s 30x P/E seems pretty attractive and that’s why we think it’s early days,” he said.
 

As investors navigate this evolving landscape, Lee’s insights suggest that technology, particularly AI, will be a cornerstone of future growth. The anticipated shift in the S&P 500’s composition highlights the transformative potential of tech stocks in addressing global economic challenges. For investors, the message is clear: the dawn of a new technological era is upon us, and those who recognize and adapt to this shift stand to gain significantly.

 
 




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Posted by Martin June 26, 2024
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Is Snowflake (SNOW) a disaster or a sleeping giant?


When Snowflake (SNOW) went public in September 2020 I believed this would be a serious competitor to other established cloud providers like Amazon and Microsoft. Their cloud services were supposed to be unique allowing users variability no one offered. I hoped the investment would be similar to investing early in companies like Amazon in 1997. This hasn’t happened. So far, investing in Snowflake turned out to be a disaster. But is it just a drawback every company experiences once in a while and at some point this turns out to be a sleeping giant waiting to be woken up? Time will show but as of today, investing in this company was a disappointment.

I invested on Snowflake early when it went IPO. I expected that it may not be a smooth and easy ride up. Everyone was pointing out that the IPO is overpriced and that the company was not making enough revenue to justify it. But so was Amazon when it went IPO and it was not making money either. All its revenue and cash flow was redirected back to future growth. Today, Amazon is a giant. I hoped Snowflake would follow the same path. And it still may follow that path!

After Amazon went public in 1997 it skyrocketed about a year after that (in 1998) and went raging until 2000. Then a dot com crash sent it to abyss. It took Amazon seven years to recover and reach the previous highs. Then, housing crisis hit and AMZN crashed again. It took until 2010 for the stock to finally break the sideways move and start moving higher:

 
AMZN vs Snowflake
 

AMZN vs Snowflake
 

Snowflake may be following the same path of scepticism of investors who are concerned about multiple things as I will try to show below. Of course, I am not saying that the charts above are indicative of the same path Snowflake must and will follow. It is a completely different company and different time. All I am saying is that as Amazon back then had many naysayers and sceptics (I was one of them) who predicted AMZN bankruptcy “next year” and thus avoided investing in the company, Snowflake may have a similar sceptic’s view. I missed investing in Amazon back then, should I miss investing in Snowflake this time too?

 

What makes Snowflake unique?

 

There are many aspects that makes me believe that Snowflake will be a serious player in the future and that it is in fact a sleeping giant. But before we review the data and address skepticism about this company, we need to first understand what Snowflake actually does and what makes this company unique.

 

What Snowflake does

 

Snowflake is a company that provides a cloud-based data platform. Essentially, it offers a service that allows businesses to store, manage, and analyze their data in the cloud. Think of it as a super-advanced, high-tech version of a traditional data warehouse, but with several modern enhancements and capabilities.

 

Key Features and Services

 

Data Storage:

 

  • Snowflake allows businesses to store large amounts of data in the cloud. This data can be structured (like databases) or semi-structured (like JSON files).

 

Data Management:

 

  • It helps in managing data efficiently, ensuring that data is accessible, secure, and organized.

 

Data Analytics:

 

  • Snowflake provides powerful tools for analyzing data. Businesses can run complex queries on their data to gain insights, make decisions, and create reports.

 

What Makes Snowflake Unique

 

Separation of Storage and Compute:

 

  • Traditional Systems: In most traditional data systems, storage (where data is kept) and compute (where data is processed and analyzed) are tied together. This means if you need more processing power, you also need to increase storage, and vice versa.

    •  

  • Snowflake’s Approach: Snowflake separates these two components. This means you can scale up or down your compute power independently of your storage. If you need more processing power for a big job, you can add it without having to pay for additional storage you don’t need. This flexibility is a significant advantage.

 

Cloud-Native:

 

  • Built for the Cloud: Unlike some older systems that were adapted for the cloud, Snowflake was designed from the ground up to operate in the cloud. This makes it more efficient and better suited to leverage cloud benefits like scalability and cost-efficiency.

    •  

  • Multi-Cloud Compatibility: Snowflake works seamlessly across multiple cloud platforms, including AWS, Azure, and Google Cloud. This means customers aren’t locked into one provider and can operate in a hybrid or multi-cloud environment.

 

Data Sharing:

 

  • Snowflake has a unique feature called Data Sharing which allows organizations to share data in real-time with other Snowflake users without having to move or copy data. This can be very useful for collaboration between departments, partners, or clients.

 

Performance and Scalability:

 

  • Performance: Snowflake uses advanced techniques to optimize query performance, making data retrieval and analysis faster.
     

  • Scalability: The platform can scale automatically to handle increased loads, ensuring consistent performance even as data and user demands grow.

 

Why Snowflake is a Potential Competitor to AWS and Azure

 

  • Specialization: While AWS and Azure offer a broad range of cloud services, Snowflake specializes in data warehousing and analytics. This specialization allows it to innovate and optimize specifically for these use cases, often outperforming more generalist solutions.

    •  

  • Flexibility: The ability to separate storage and compute gives Snowflake a cost and performance edge in many scenarios, making it an attractive choice for businesses with significant data needs.

    •  

  • Integration: Snowflake’s multi-cloud compatibility and seamless integration with other tools and platforms make it a flexible choice for businesses already using other cloud services.

 

I invested in Snowflake (as I mentioned above) and because I expected that it may not be an easy ride as there will be a lot of skeptics, I decided to use options to lower my cost basis selling options around this company. I was selling Iron Condors and covered calls and I went aggressive. Doing so, I generated so much income that I was able to lower my cost basis to $7.86 a share! Yes, a staggering $7.86!

 
Snowflake cost basis
 

With this cost basis, it doesn’t bother me anymore where the price of this stock is. But I still want to review whether it makes sense to keep investing in this company. Let’s review the reasons for the recent decline:

 

Reasons for Snowflake price decline

 

Valuation Concerns:

 

  • High Initial Valuation: Snowflake’s IPO was one of the most hyped in recent years, leading to a high initial valuation. This often results in heightened expectations that can be challenging to meet.

    •  
    Snowflake valuation
     

  • Price-to-Sales Ratio: Despite strong revenue growth, Snowflake’s price-to-sales ratio has been exceptionally high, leading to concerns about whether its stock price is justified by its earnings potential.

 

Growth Rate Deceleration:

 

  • Slowing Revenue Growth: Snowflake’s revenue growth rate has been decelerating. Investors are cautious about companies that do not maintain high growth rates, especially when valued at premium levels.

    •  
    Snowflake revenue
     

    Snowflake free cash flow
     

  • Customer Growth: While Snowflake continues to add new customers, the pace at which it is doing so has slowed, leading to concerns about its future growth trajectory.

 

Competitive Pressure:

 

  • AWS and Azure Dominance: Snowflake faces stiff competition from well-established players like AWS and Azure, which have far more resources and established customer bases.
  • Price Competition: Aggressive pricing strategies by competitors can erode Snowflake’s market share and margins.

 

Profitability Concerns:

 

  • Lack of Profitability: Snowflake is still not profitable, and the market has become less tolerant of high-growth, non-profitable tech stocks, especially with rising interest rates.
  • High Operating Costs: The company has significant operating expenses, including research and development, and sales and marketing, which have kept it from achieving profitability.

 

Macroeconomic Factors:

 

  • Interest Rate Environment: Rising interest rates have impacted high-growth tech stocks, as future earnings are discounted more heavily.
  • Market Sentiment: General market sentiment has shifted towards value stocks and away from high-growth tech stocks due to concerns about inflation and economic slowdown.

 

Insider Selling:

 

  • Selling Pressure: There has been significant insider selling, which can be perceived negatively by the market as a lack of confidence by those closest to the company.

 

Future Prospects and Considerations

 

Innovation and Product Development:

 

  • Snowflake’s continued innovation in data warehousing and analytics could drive future growth. Their ability to integrate with other platforms and provide unique solutions will be crucial.

 

Expansion into New Markets:

 

  • Expanding into new markets and industries can provide new growth avenues. Their strategic partnerships and international expansion efforts will be key areas to watch.

 

Cost Management:

 

  • Improving operational efficiency and managing costs will be essential for Snowflake to achieve profitability and sustain investor confidence.

 

Adoption of New Technologies:

 

  • Leveraging emerging technologies like artificial intelligence and machine learning can provide competitive advantages and drive future growth.

 

All these are worries investors and naysayers are using to justify Snowflake as bad investment and reasons for declining price of the stock. They compare it to SNOW’s competitors and point out losses and lack of revenue. So let’s review the data side-by-side with Amazon and Microsoft to see how Snowflake is doing:

 

Metric Snowflake (SNOW) Amazon (AMZN) Microsoft (MSFT)
Revenue (FY 2023) $2.07 billion $514 billion $198.3 billion
    $80.1 billion (AWS) $75.3 billion (Intelligent Cloud)
Recent Quarterly Revenue $774.7 million $21.35 billion (AWS) Azure: 27% growth YoY
Revenue Growth Rate 66% YoY 29% YoY (AWS) 27% YoY (Azure)
Net Income (FY 2023) -$679 million (net loss) $33.4 billion $72.7 billion
Gross Profit Margin 70% High (AWS-specific not detailed) High (cloud services)
Operating Income (FY 2023) N/A $22.8 billion (AWS) N/A (Intelligent Cloud contribution)

 

Snowflake has shown impressive growth and potential, particularly in the niche market of cloud data warehousing. However, it is still in the growth phase, focusing on expanding its market presence and achieving profitability. Amazon’s AWS and Microsoft’s Azure are much larger, more diversified, and profitable segments within their respective companies, with strong market positions and steady growth rates. Snowflake’s future success will depend on its ability to innovate, manage costs, and compete effectively against these cloud giants.

 
It is true that when we put the numbers next to each other we see that Snowflake is not doing well and the price decline is justified. Right?
 

If you believe that, you have been fooled. Comparing SNOW with AMZN and MSFT like that is comparing apples and oranges. We are looking at companie in completely different stages of their development. Snowflake went public in 2020, Amazon went public in 1997 and Microsoft in 1986. We need to look at the data within the same range of development to truly compare how Snowflake is doing vs. Amazon and Microsoft. Snowflake is just three years old, so let’s compare it to Amazon and Microsoft when these companies were three years old:

 

Financial Performance Comparison

 

1. Revenue

 

Snowflake (2023)

 

  • Annual Revenue: $2.07 billion
  • Recent Quarterly Revenue: $774.7 million

 

Amazon (2000)

 

  • Annual Revenue: $2.76 billion
  • Recent Quarterly Revenue: $672 million

 

Microsoft (1989)

 

  • Annual Revenue: $804 million
  • Recent Quarterly Revenue: $233 million

 

2. Net Income

 

Snowflake

 

  • Net Income: -$679 million (net loss)

 

Amazon

 

  • Net Income: -$720 million (net loss)

 

Microsoft

 

  • Net Income: $170 million

 

3. Growth Rate

 

Snowflake

 

  • Revenue Growth Rate: 66% year-over-year

 

Amazon

 

  • Revenue Growth Rate: Rapid, doubling year-over-year in early years

 

Microsoft

 

  • Revenue Growth Rate: Significant, revenue increased by more than 100% in the first three years post-IPO

 

Let’s put these key metrics side-by-side for better comparison:

Metric Snowflake (SNOW)
(2023)		 Amazon (AMZN)
(2000)		 Microsoft (MSFT)
(1989)
Annual Revenue $2.07 billion $2.76 billion $804 million
Recent Quarterly Revenue $774.7 million $672 million $233 million
Revenue Growth Rate 66% YoY Rapid growth Significant growth
Net Income -$679 million (net loss) -$720 million (net loss) $170 million
Market Position Niche in data warehousing Emerging e-commerce, starting cloud Leading software company
Focus Areas Data warehousing, analytics E-commerce, beginning of cloud Operating systems, software

 

Comparing Snowflake’s financials and growth metrics three years after its IPO with those of Amazon and Microsoft at similar stages, it is clear that all three companies experienced rapid growth and faced profitability challenges early on. Snowflake’s current growth rate is robust, similar to Amazon’s and Microsoft’s early years. However, the competitive landscape and market dynamics differ significantly, making direct comparisons challenging but still insightful. Snowflake is positioning itself in a niche market with potential, similar to how Amazon and Microsoft carved out their dominant positions over time.

The comparison indeed shows that Snowflake (SNOW) is performing reasonably well considering its stage of growth. Here’s a more detailed analysis of why investor skepticism might be overblown:

 

Key Points of Comparison

 

Revenue Growth:

 

Snowflake’s revenue growth rate of 66% year-over-year is impressive. This rapid growth is comparable to the early years of both Amazon and Microsoft, indicating a strong demand for its services.

 

Market Position:

 

Although Snowflake operates in a niche market, its focus on data warehousing and analytics positions it well against larger competitors. Amazon and Microsoft, despite their broader scope now, also started with niche focuses (e-commerce for Amazon, operating systems for Microsoft) and expanded over time.

 

Profitability:

 

Like many tech companies in their early stages, Snowflake is not yet profitable. This mirrors Amazon’s situation three years after its IPO when it also faced significant losses as it invested heavily in growth. Microsoft, being an exception with profitability early on, still invested significantly in growth and expansion.

 

Strategic Positioning and Innovation:

 

Snowflake’s innovation in data management and cloud computing makes it a strong contender in its sector. With strategic partnerships and continuous product development, it has the potential to capture more market share.

 

Long-term Perspective

 

Investment in Growth: Snowflake’s substantial investment in technology and infrastructure is geared towards long-term growth. This strategy, although impacting short-term profitability, is essential for establishing a solid market position.

Market Potential: The demand for cloud computing and data analytics continues to rise. Snowflake’s specialized solutions cater to this growing market, suggesting substantial growth potential.

Comparative Performance: When comparing Snowflake’s current performance with Amazon and Microsoft at similar stages, it’s evident that all three companies faced significant challenges but had strong growth trajectories. This comparison helps underline that early skepticism might not reflect Snowflake’s long-term potential.

 

Investor Sentiment

 

Skepticism and Volatility: Early-stage companies often face skepticism due to high valuations and initial losses. However, historical comparisons with Amazon and Microsoft show that early challenges and skepticism are common, and overcoming these can lead to substantial long-term success.

 

Conclusion

 

Snowflake’s current performance and growth strategy are indicative of a company with significant potential. While investor skepticism is not uncommon for companies at this stage, the historical context of Amazon and Microsoft suggests that early-stage challenges do not preclude long-term success. Snowflake is well-positioned in a growing market, and its innovative approach could see it becoming a major player in the cloud computing and data analytics industry. The current selling although typical to Wall Street spookiness with everything and every time, is not justified and the current prices are a great opportunity to invest in Snowflake.

It always amazes me that investors are looking for a holy grail of finding future Amazon and when they have one right under their noses, they reject it. Of course, this analysis (if we can call it one) is not a guarantee of success, Snowflake may fail and never emerge, but the opportunity is here. If you decide to invest at the current price levels, be prepared for long time while your investment may be doing nothing or even losing you money. Remember, if you invested in Amazon it took 10 years before your investment started showing some profits. Snowflake may be offering the same path.

Don’t let naysayers shake your confidence. I still think Snowflake is a sleeping giant that is waiting to be awaken. This investment is a long run and if you stay invested, you will be rewarded.

 
 




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Posted by Martin June 25, 2024
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I hopped on the NVDA bandwagon, too


Today (July 1st, 2024), the sky was falling and I got stopped out from my NVDA position in the morning. I set my stop loss at $120 a share. But later, buyers stepped in and started buying. So, the doom and gloom hasn’t happened (it still may happen but at this point it is less likely), so I re-entered the position.
 

Everybody is crazy about Nvidia (NVDA) stock and everyone wants to own it. I was a bit cautious buying it because in my opinion, the stock is parabolic. But there were two things happening recently, and both events made me to reconsider.

 
NVDA
 

One event just happened – sell off. NVDA was selling recently and corrected almost 10% (not exactly but close). Today, big money are buying back. So I decided to do the same and bought 50 shares today. Nothing crazy like the guys from WallStreetBets who go all in (and usually lose all), but enough to make me happy.

I also checked the stocks valuation (this was sparked by Tom Lee from Fundstrat and his few interviews on YouTube and MSN). And when checking the valuation of NVDA, we can see that today, and per today’s metrics, NVDA is overvalue, but when looking into the near future, we see that the stock is fairly valued and slightly undervalued (yes, it sounds weird but it is undervalued).

 
NVDA valuation
 

The second event that happened last week was NVDA announcing going into cloud business, creating its own cloud service equipped with their own chips and hardware but also developing a software that will run the cloud. This literally shifts NVDA from a hardware maker to a service provider (and along the way bullying big players like Amazon into allowing them to use their facilities). This is a big deal. It is the similar Apple (AAPL) used before shifting from a phone maker to a service provider (and Apple today has ever growing service segment that is now as large as the phones segment). This will make NVDA surviving the tough competition once the IA chip making segment loses steam (which it will eventually do).

Today, I bought 50 shares of NVDA and later on, I may buy more.

 
 




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Posted by Martin June 24, 2024
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Market Musings: Roller Coaster or Merry-Go-Round?


Welcome to the latest episode of Market Musings, where today’s stock market feels like it’s torn between a roller coaster and a merry-go-round. Investors are clutching their seats, trying to figure out if we’re in for thrilling ups and downs or just going in circles.

Today’s market action was dominated by the Fed’s latest pronouncements, leaving traders feeling like they were deciphering an ancient script. The Fed, still in its hawkish mode, hinted at further tightening, much to the chagrin of those hoping for a more dovish pivot. It’s like waiting for the DJ to play a slow song at a party, only to get hit with another round of techno.

 
Market Musings
 

Inflation, our ever-persistent fly in the ointment, continues to buzz around, reminding everyone that it’s not going anywhere soon. Despite the Fed’s best efforts, it seems determined to stick around like that one guest who just won’t take the hint.

The AI sector, meanwhile, remains the star of the show, dazzling everyone with promises of innovation and growth. Investors are treating AI stocks like the new superfood, convinced they’ll solve all our problems. Value stocks, on the other hand, are trying their best to stay relevant, but it’s clear they’re feeling a bit overshadowed by all the AI hype.

Geographically, attention is shifting more towards emerging markets. Think of it as investors discovering a new travel destination – exciting, a bit risky, but with the promise of great rewards. Asia-Pacific regions continue to draw interest, as investors seek diversification and potential growth opportunities outside the usual suspects.

Looking ahead to tomorrow, expect the market to keep its eyes peeled for any new data that might sway sentiment. The tug-of-war between the Fed’s policies and inflation will continue, and AI stocks will likely remain in the spotlight. Keep an eye on those emerging markets, too – they might just be the next big thing.

So, buckle up and stay tuned, because whether it’s a roller coaster or a merry-go-round, the market’s ride is far from over.

 
 




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Posted by Martin June 24, 2024
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How to Build a Dividend Portfolio Generating $1,000 a Month with Minimal Investment


Building a dividend portfolio that generates a consistent $1,000 a month is a compelling goal for many investors. While achieving this with minimal investment requires strategic planning, it is indeed possible by leveraging high-yield investments, reinvesting dividends, and maintaining a disciplined approach. Here’s a detailed guide on how to achieve this financial milestone.

 

Understanding Dividends

 

Dividends are payments made by a corporation to its shareholders, usually derived from profits. They are typically distributed on a quarterly basis but can also be paid monthly or annually. The primary attraction of dividends is the passive income they provide, which can be reinvested to buy more shares or used as a source of regular income.

 

Setting Realistic Expectations

 

Before diving into the strategies, it’s essential to set realistic expectations. A $1,000 monthly dividend equates to $12,000 annually. Assuming an average dividend yield of 4%, you would need an investment of $300,000. However, if you’re starting with less capital, you’ll need to focus on higher-yielding investments, which come with higher risks.

 

Strategy 1: High-Yield Dividend Stocks

 

High-yield dividend stocks are shares of companies that offer higher-than-average dividend yields. These stocks are often found in sectors like utilities, real estate investment trusts (REITs), master limited partnerships (MLPs), and business development companies (BDCs). While they offer attractive yields, it’s crucial to assess the sustainability of their dividends.
 

  1. Research and Selection: Look for companies with a strong history of dividend payments, stable earnings, and manageable debt levels. Tools like dividend screeners can help identify high-yield stocks.

    2.  

  2. Diversification: Spread your investments across different sectors to mitigate risk. For example, you might invest in a mix of utilities, REITs, and consumer staples.

    3.  

  3. Monitoring: Regularly review your portfolio to ensure that the companies you’ve invested in are maintaining their dividend payments and financial health.

 
dividend portfolio

 

Strategy 2: Dividend Growth Stocks

 

Dividend growth stocks are companies that not only pay dividends but also consistently increase their dividend payouts. These companies typically have strong cash flows and a commitment to returning capital to shareholders.
 

  1. Focus on Quality: Look for companies with a history of dividend increases, strong balance sheets, and consistent earnings growth.

    2.  

  2. Reinvestment: Use a Dividend Reinvestment Plan (DRIP) to automatically reinvest dividends to buy more shares. This compounding effect can significantly boost your portfolio’s value over time.

 

Strategy 3: Exchange-Traded Funds (ETFs) and Mutual Funds

 

Dividend-focused ETFs and mutual funds can provide diversification and professional management. These funds pool money from multiple investors to buy a diversified portfolio of dividend-paying stocks.
 

  1. Dividend ETFs: Look for ETFs that focus on high dividend yields or dividend growth. Examples include the Vanguard High Dividend Yield ETF (VYM) and the Schwab U.S. Dividend Equity ETF (SCHD).

    2.  

  2. Managed Funds: Consider mutual funds managed by professionals who specialize in dividend-paying stocks. These funds can offer exposure to a broad range of high-quality dividend stocks.

 

Strategy 4: Real Estate Investment Trusts (REITs)

 

REITs are companies that own, operate, or finance income-producing real estate. They are required to distribute at least 90% of their taxable income to shareholders as dividends, making them attractive for income-seeking investors.
 

  1. Equity REITs: Invest in properties like apartments, offices, and shopping malls. They generate income through rent and property management.

    2.  

  2. Mortgage REITs: Invest in real estate debt (mortgages). They offer higher yields but come with increased risk due to interest rate fluctuations.

 

Calculating Your Investment Needs

 

To determine the amount of capital required to generate $1,000 a month in dividends, use the formula:
 

Investment Needed = Annual Dividend Income/Dividend Yield

 

For example, with a target of $12,000 annual income and an average dividend yield of 5%:
 

Investment Needed = 12,000/0.05 = 240,000

 

Building Your Portfolio

 

  1. Initial Capital: Start with whatever amount you can comfortably invest. Even small, regular contributions can grow significantly over time.

    2.  

  2. Consistent Contributions: Regularly add to your portfolio, taking advantage of dollar-cost averaging to reduce the impact of market volatility.

    3.  

  3. Reinvestment: Reinvest dividends to accelerate growth and compound your returns.

 

Managing Risks

 

  1. Diversification: Spread investments across different sectors and asset classes to reduce risk.

    2.  

  2. Regular Review: Continuously monitor and review your portfolio, adjusting as necessary to ensure it aligns with your income goals and risk tolerance.

    3.  

  3. Emergency Fund: Maintain an emergency fund to avoid having to sell investments during market downturns.

 

Conclusion

 

Building a dividend portfolio that generates $1,000 a month is an achievable goal with strategic planning and disciplined investing. By focusing on high-yield stocks, dividend growth stocks, ETFs, and REITs, and consistently reinvesting dividends, you can grow your portfolio and achieve your income objectives. Remember, while high yields can accelerate your progress, balancing risk and reward is crucial for long-term success. Start small, stay consistent, and let the power of compounding work in your favor.

 
 




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Posted by Martin June 23, 2024
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Bristol Myers Squibb Co (BMY) is facing significant challenges, should you invest?


Bristol Myers Squibb Co (BMY) has long been a stalwart in the pharmaceutical industry, renowned for its innovative therapies and robust product pipeline. However, the company is facing a significant challenge with a projected 92% drop in operating earnings for 2024, primarily due to expiring patents on key drugs. This blog post aims to provide a detailed analysis of the investment potential of BMY, comparing its current situation with AbbVie (ABBV), which faced a similar scenario with Humira. We’ll also delve deeply into BMY’s dividend history, its classification as a Dividend Challenger, and assess whether it can maintain its dividend payments despite upcoming financial pressures.

 

The Impact of Expiring Patents on BMY

 

The primary reason behind the anticipated drop in BMY’s operating earnings is the expiration of patents on blockbuster drugs such as Revlimid and Eliquis. These drugs have been significant revenue drivers for BMY, and their loss of exclusivity means they will now face intense generic competition. This situation is akin to what AbbVie experienced with Humira, a top-selling drug that also faced generic competition post-patent expiration.

Expiring patents pose a significant threat to earnings. BMY has been trading below its fair value since 2018. Back then it may have been a good looking investment, but is it a good investment today?

 
BMY EPS vs price

 

Comparing BMY with AbbVie

 

To understand the potential path for BMY, we can look at AbbVie’s journey:

 

AbbVie Case Study

 

Patent Expiry Impact:

 

Humira Loss: AbbVie’s Humira faced patent expiration, leading to a sharp decline in revenue. The stock price dropped by around 50% between 2018 and 2020.

 

Recovery Factors:

 

Strong Pipeline: AbbVie’s robust pipeline and successful launch of new drugs like Skyrizi and Rinvoq were crucial in driving recovery.

Strategic Acquisitions: The acquisition of Allergan diversified AbbVie’s portfolio, providing new revenue streams and growth opportunities.

Effective Management: AbbVie’s management effectively controlled costs and invested in new growth areas, contributing to the recovery of its stock price. As of now, AbbVie’s stock has not only recovered but is also trading near its all-time high, showcasing the effectiveness of its strategic initiatives.

 

Assessing BMY’s Potential for Recovery

 

BMY’s Pipeline and Strategic Actions

 

Late-Stage Pipeline:

 

Reblozyl: Used for treating anemia in patients with myelodysplastic syndromes and beta-thalassemia.

Zeposia: Approved for multiple sclerosis and ulcerative colitis.

Opdivo: Continuously expanding its indications in oncology, enhancing its market presence.

 

New and Recently Launched Drugs:

 

Breyanzi: A CAR T-cell therapy* for lymphoma, representing significant advancement in cancer treatment.

Abecma: Another CAR T-cell therapy for multiple myeloma, contributing to BMY’s innovative oncology portfolio.

Camzyos: For hypertrophic cardiomyopathy, a potential blockbuster in the cardiovascular space.

 

Acquisitions and Partnerships:

 

Myokardia Acquisition: The acquisition brought Camzyos into BMY’s portfolio, enhancing its cardiovascular drug offerings.

Strategic Collaborations: Various partnerships aim to bolster the pipeline and expand into new therapeutic areas, diversifying revenue sources.

 

Dividend Analysis: Is BMY’s Dividend Safe?

 
BMY key metrics
 

Given the projected drop in earnings, investors are understandably concerned about the safety of BMY’s dividend. Let’s examine several key metrics to assess this:

 

Payout Ratio:

 

Historically, BMY has maintained a moderate payout ratio. However, with the projected drop in earnings, the payout ratio for 2024 is expected to be around 900%. This indicates that dividends far exceed earnings, making the current dividend payout unsustainable in the long term unless the company can significantly boost its earnings or reduce dividend payouts.

2021: 57.1%
2022: 61.8%
2023: 67.7%
2024 (Projected): 900%

The payout ratio shows a significant increase in 2024 due to the projected drop in earnings. A payout ratio of 900% indicates that the dividends far exceed the earnings, which is unsustainable in the long term.

 

Free Cash Flow (FCF) Coverage:

 

BMY’s FCF coverage ratio has been above 1, suggesting that the company generates enough free cash flow to cover its dividends. However, the declining trend in FCF coverage, projected to be 1.18 in 2024, indicates potential pressure on cash flow sustainability.

2021: 1.50
2022: 1.38
2023: 1.27
2024 (Projected): 1.18

The FCF coverage ratio remains above 1, indicating that the company generates enough free cash flow to cover its dividends. However, the declining trend suggests potential pressure on cash flow sustainability.

 
BMY FCF vs dividend

 

Balance Sheet Strength:

 

BMY’s increasing debt levels could pressure its financial flexibility, affecting its ability to sustain dividends. The debt-to-equity ratio is projected to rise to 0.80 in 2024, reflecting a growing leverage that warrants attention.

Despite these concerns, BMY has a solid history of paying dividends and is classified as a Dividend Challenger. This status reflects a relatively shorter but consistent history of dividend increases, spanning at least five consecutive years but fewer than ten years.

 

Dividend Challenger: BMY’s Status and Implications

 

Dividend Kings are companies that have increased their dividend payouts for at least 50 consecutive years. Dividend Aristocrats are part of the S&P 500 and have increased their dividends for at least 25 consecutive years. Dividend Contenders have a streak of 10-24 years, while Dividend Challengers have increased their dividends for 5-9 consecutive years. BMY falls into the Dividend Challenger category, indicating a positive trend in dividend growth but not the long-term reliability of the more established Dividend Aristocrats or Kings.

 

Conclusion: Can BMY Follow AbbVie’s Path to Recovery?

 

Based on the comparison with AbbVie, it is plausible that BMY could experience a similar recovery path if it successfully leverages its pipeline, engages in strategic acquisitions or partnerships, and manages costs effectively. While the initial impact of patent expirations is significant, a strong strategic response could lead to a recovery in BMY’s stock price over time.

 

Key Recommendations for Investors

 

Monitor Pipeline Developments: Stay updated on the progress of clinical trials for BMY’s pipeline drugs and any regulatory approvals.

Evaluate Market Launches: Assess the market performance of recently launched drugs like Breyanzi, Abecma, and Camzyos.

Strategic Developments: Keep an eye on any strategic acquisitions or partnerships that could further strengthen BMY’s pipeline and market position.

Dividend Sustainability: Regularly review BMY’s financial statements and management commentary on dividend policy to gauge the sustainability of dividend payments.

 

Final Thoughts

 

Bristol Myers Squibb is at a critical juncture, facing significant challenges due to expiring patents on key drugs. However, the company’s strong and diversified pipeline, innovative therapies, and strategic initiatives provide a foundation for potential recovery. While BMY is not a Dividend King or Aristocrat, its status as a Dividend Challenger and its commitment to returning value to shareholders through dividends offer some reassurance to investors.

By closely following the factors outlined above, investors can make informed decisions about the potential recovery and long-term prospects of Bristol Myers Squibb. If BMY can navigate its current challenges effectively, it may well follow a path similar to AbbVie, emerging stronger and continuing to provide value to its shareholders.
 

* CAR stands for Chimeric Antigen Receptor. CAR T-cell therapy is a type of treatment in which a patient’s T cells (a type of immune cell) are changed in the laboratory so they will attack cancer cells.

 
 




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Posted by Martin June 22, 2024
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The Complex Journey of Yahoo’s Investment in Alibaba and the Current State of BABA Stock


Yahoo’s investment in Alibaba (BABA) in 2005 marked a significant milestone in the tech world, demonstrating the potential of international partnerships and investments in emerging markets. However, the journey has been fraught with challenges, regulatory hurdles, and corporate governance issues. This blog post delves into the intricacies of Yahoo’s investment, the controversial spin-off of Alipay (now Ant Financial), and the current financial situation of Alibaba (BABA) as its stock has seen a dramatic decline from $300 to $60 since 2020.

 

Yahoo’s Investment in Alibaba (BABA): A Promising Start

 

In 2005, Yahoo made a strategic decision to invest $1 billion in Alibaba, acquiring a 40% stake in the burgeoning Chinese e-commerce company. This investment was a game-changer for Alibaba, providing it with the necessary capital to expand and dominate the Chinese market. The value of Alibaba grew exponentially, turning Yahoo’s stake into a highly valuable asset.

 

The Alipay Spin-off: A Controversial Move

 

In 2011, a significant controversy emerged when Jack Ma, the CEO of Alibaba, spun off Alipay into a separate entity. This move was justified as a regulatory compliance measure, given Chinese laws restricting foreign ownership in the financial sector. However, Yahoo and SoftBank, another major shareholder, claimed they were not adequately informed or consulted about the spin-off, leading to a protracted dispute.

 
Is BABA dying investment?
 

The spin-off raised serious questions about corporate governance and the enforceability of shareholder rights in companies using Variable Interest Entity (VIE) structures. Despite the controversy, a settlement was reached in 2011, where Alibaba agreed to compensate Yahoo and SoftBank if Alipay went public or was sold. This settlement provided some financial redress to the aggrieved shareholders.

 

Yahoo’s Financial Outcome

 

Despite the challenges, Yahoo’s investment in Alibaba proved to be highly lucrative. Over the years, Yahoo gradually sold its stake in Alibaba through various transactions, realizing tens of billions of dollars in returns. This substantial financial gain underscored the high potential rewards of investing in emerging markets, despite the associated risks and complexities.

 

The Current Financial Situation of Alibaba (BABA)

 

Since its peak in 2020, Alibaba’s stock has experienced a dramatic decline, plummeting from $300 to around $60. Several factors have contributed to this downturn:
 

  1. Regulatory Crackdowns: The Chinese government’s crackdown on tech companies has significantly impacted Alibaba. Measures aimed at curbing monopolistic practices, protecting data privacy, and increasing regulatory scrutiny have all weighed heavily on the company’s stock price.

    2.  

  2. Economic Uncertainty: China’s broader economic slowdown, exacerbated by the COVID-19 pandemic and geopolitical tensions, has created an uncertain environment for Alibaba and other Chinese tech giants.

    3.  

  3. Investor Sentiment: Negative investor sentiment towards Chinese stocks, fueled by regulatory fears and geopolitical risks, has led to a sell-off in Alibaba shares. The VIE structure, which allows foreign investment in Chinese companies, has also come under scrutiny, adding to investor concerns.

    4.  

  4. Ant Financial’s IPO Cancellation: The halted IPO of Ant Financial in 2020, following regulatory intervention, has further dampened investor confidence. This event highlighted the regulatory risks and uncertainties associated with Alibaba and its affiliated companies.

 

Financial Performance and Outlook

 

Despite these challenges, Alibaba remains a major player in the global e-commerce and cloud computing sectors. However, its recent financial performance reflects the broader challenges it faces:
 

  • Revenue Growth: Alibaba’s revenue growth has slowed, impacted by regulatory measures and economic conditions. While it continues to generate significant revenue from its core e-commerce operations, growth rates have moderated.

    •  

  • Profit Margins: Increased regulatory compliance costs and investments in new business areas have put pressure on profit margins.

    •  

  • Cloud Computing: Alibaba’s cloud computing division remains a bright spot, showing robust growth and potential. However, it is still a smaller part of the overall business compared to e-commerce.

 

BABA valuation summary

 

BABA appears to be extremely undervalued At the current price of $73.35 a share. It’s fair value sits at $245.85 a share and it offers a significant profit potential of 236.56% return on invested capital (361.13% annualized return). But will this valuation justify risks associated with this company (and Chinese stocks in general)?

 
BABA potential
 

In summary:
 

Stock Price: As of the latest data, BABA’s stock is trading around $73.35, down from its peak of $309.92 in 2020.

Revenue: Despite challenges, Alibaba continues to generate strong revenue, with a focus on diversifying its income streams.

Profit Margins: Regulatory costs and investments in new areas have impacted margins, but the company remains profitable.

Growth Potential: Alibaba’s cloud computing division and international expansion efforts offer potential growth avenues amidst domestic challenges.

Indirect investment risk: Investing in Chinese companies cannot be done directly, so indirect investment via a VIE structures can complicate shareholder rights enforcement.
 

Investors should stay informed and consider the broader regulatory and economic context when evaluating Alibaba’s stock. While the road ahead is fraught with challenges, Alibaba’s foundational strengths and strategic initiatives could pave the way for a potential recovery in the long term.

Yahoo’s investment in Alibaba and the subsequent developments offer valuable lessons in the complexities of international investments, corporate governance, and regulatory risks. While Yahoo ultimately reaped substantial financial rewards, the journey was marked by significant challenges and controversies.

For Alibaba, the future remains uncertain. The company faces ongoing regulatory scrutiny, economic headwinds, and shifting investor sentiment. However, its strong market position and diversification into cloud computing and other sectors could provide avenues for future growth.

Investors considering Alibaba (BABA) should weigh the potential rewards against the inherent risks, keeping a close eye on regulatory developments and the broader economic landscape. As the story of Yahoo and Alibaba illustrates, investing in emerging markets can offer substantial returns but also comes with significant complexities and uncertainties.

 
 




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Posted by Martin June 21, 2024
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Understanding Why Investors Sell Shares at a Loss


Investing in the stock market can be a rollercoaster of emotions, especially for new investors. One of the more perplexing actions is when investors decide to sell their shares at a loss before those losses become “actualized.” On the surface, this may seem counterintuitive, but there are several strategic reasons behind this decision. Let’s dive into the main factors that drive investors to cut their losses.

 

1. Tax Benefits: Investors may desire a Tax-Loss Harvesting

 

One of the primary reasons investors sell shares at a loss is to take advantage of tax-loss harvesting. This strategy involves selling underperforming stocks to offset capital gains taxes on profitable investments. By doing so, investors can reduce their overall tax liability, which can be particularly beneficial at the end of the fiscal year.

For example, if an investor has $10,000 in gains from successful investments but also has $5,000 in losses from underperforming stocks, selling those losing stocks can offset the gains, resulting in a lower taxable amount. This strategy can effectively increase an investor’s net returns after taxes.

 

2. Some Investors Want Rebalancing their Portfolio

 

Another reason to sell at a loss is portfolio rebalancing. Over time, the allocation of assets in a portfolio can drift away from the investor’s target allocation due to varying performance across different asset classes. Selling underperforming stocks can help bring the portfolio back to its desired allocation.

For instance, if an investor wants to maintain a 60% equity and 40% bond portfolio, but the equities have performed poorly, they might need to sell some of their stocks (even at a loss) to buy more bonds and restore the balance. This disciplined approach ensures that the portfolio remains aligned with the investor’s risk tolerance and investment goals.

 

3. Other Investors are Cutting Losses and Preserving Capital

 

One of the cardinal rules of investing is to avoid large losses that can be difficult to recover from. Selling shares at a loss can be a way to cut losses early and preserve capital for future opportunities. This is often referred to as “stop-loss” selling.

For example, if an investor’s analysis indicates that a stock’s fundamental value has deteriorated or market conditions have changed significantly, it may be prudent to sell the stock before the losses deepen. This approach helps in mitigating further losses and protecting the investor’s remaining capital.

 

4. Opportunity Cost

 

Every dollar invested in a losing stock is a dollar that could potentially be invested in a more promising opportunity. By selling a losing position, investors can free up capital to reinvest in stocks with better growth prospects or stronger fundamentals. This concept is known as managing opportunity cost.

For instance, if an investor holds a stock that is down 20%, but another stock with better growth potential has emerged, selling the underperforming stock allows the investor to reallocate funds to the more promising investment. This proactive approach can enhance overall portfolio performance.

 

5. Psychological Relief

 

Sometimes, selling a losing position provides psychological relief. Holding onto a losing investment can be stressful and emotionally taxing, causing anxiety and clouded judgment. By selling the stock, investors can gain peace of mind and refocus on more productive investment opportunities.

 
Investors relieved from stress of losing positions
 

For new investors, this psychological benefit can be significant. It helps them avoid the trap of “falling in love” with a stock and holding onto it despite its poor performance, which can lead to even greater losses.

 

Conclusion

 

Selling shares at a loss is not inherently a sign of failure or poor judgment. Instead, it can be a strategic decision based on tax benefits, portfolio rebalancing, capital preservation, opportunity cost management, and psychological well-being. Understanding these reasons can help new investors make more informed decisions and navigate the complexities of the stock market with greater confidence.

Investing is as much about managing risks as it is about seeking rewards. By knowing when to cut losses, investors can protect their portfolios from significant downturns and position themselves for long-term success.

 
 




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