A potential activist target

I bet you likely have never heard the company called Kulicke & Soffa Industries (KLIC). KLIC is a rather small company with a market cap of only $1 B and based in Singapore. But it is actually a industry leader in the semiconductor market: manufacture and sell wire bonding to bond semiconductors to circuit boards. While small, it is a cash gusher with a huge free cash flow in terms of its size. It has over $5 million cash in hands without debt. With a share price of $13, half of the stock price is actually cash. Right now, its P/E is about 10 but if you factor in its cash load, the P/E can be halved or even lower. In other words, KLIC is extremely cheap at this price. However, KLIC revues to pay a dividend or buy back stocks. With this kind of cash rich business at this low stock price but failing to return values to investors, it is normally attracting the attention of the so-called activist investors. The most famous one is Carl Icahn. Whenever Icahn touches a company, its stock will shoot up to moon as investors know that Icahn will do all he can to boost the value for the investors, which will also add great value to himself.  I won't be surprised to see this happen to KLIC by Icahn or someone else. It make a lot of sense to me. If you want to bet on this, you should consider to get in now when KLIC is still cheap at the moment.

The death of the Euro

We are heading to Panama for vacation today. Just a quick note about Euro.

I have lost track how many times I've talked about Euro here and predicted it will fall apart within years. I have traded several times with quite some profits taken. The latest time I talked about it was probably this one. Well you have probably also noticed that Euro has become stronger these days against the US$, $1.38 at the moment. Does this mean the Eurozone countries have solved their crisis effectively, which is then reflected in the euro? Not a chance! According to Citigroup, the slight rebound in Europe over the summer will not be enough to stop the Eurozone going from bad to worse, with a string of soft defaults/restructurings. Citi is forecasting Greek devastation and unstoppable debt spirals in Italy and Portugal

To me Euro is still a dying currency, just a matter of time. No need to simply believe me, but see what other people, especially those from the Eurozone, have thought about the situation:

An astonishing new book by François Heisbourg – La Fin du Rêve Européen (The end of the European dream) – argues that the "euro cancer" must be cut out to save the rest of the EU Project before it is too late.
"The dream has given way to nightmare. We must face the reality that the EU itself is now threatened by the euro. The current efforts to save it are endangering the Union yet further," he writes.

Yes, Euro is appreciating against the US$. But this is just like two types of toilet paper competing to see which one will go to the toilet first. Sooner or later, both of them will go. Right now, people got tired of the US$ due to endless problems associated with it. But it is no better with Euro. I'm sticking to the gun that I will short Euro again. The current poor sentiment for US$ will push Euro up further. However, the higher it goes, the better profit one may get.  I'm just waiting for the another extreme to come before pulling the trigger. I will let you know.

Apple has broken out to the upside

Apple jumped $12 today and has definitely broken out through its resistance line. I expect Apple will quickly touch $550 in the next few weeks. Tomorrow the Apple CEO Tim Cook will unveil the next generation of its tablets–the iPad and iPad Mini and some people even expect more surprises such as iWatch etc. While anything could happen and Apple may jump higher further depending on what Cook will say, please remember that the Street has the habit to buy the rumors and sell the news. I feel it is more likely the share price will come down tomorrow. Since the previous resistance line ($509) becomes now the support line, it will become a good buy again if Apple indeed comes down to the support level. We will see.

A pivotal point for Apple

If you bought Apple around $450 as I suggested, you should be happy now as Apple is reaching its near term high again, closed at $508 on Friday. I think Apple has a great potential to double in the next 12-18 months, since it has a lot of new products lining up and ready to be introduced in the next few months. No doubt Apple's worst time is over. All it needs is the momentum to push through the resistance line exactly at the current price point. You see, Apple is sitting right at this resistance line. If it breaks up through it, likely it may quickly jump to its next stop around $550. But it is also poised for a bearish technical patterning: a double peak. If it does not have enough strength this time to go further up, it then has to come back again and likely to test the low around the first support line at about $475. However, I'm biased for a strong and bullish prospect for Apple and I think it will likely follow Google to break out over the $1000 mark in not so far future! I bet this may happen next year in 2014.

Why am I so happy when IBM plunges?

IBM plunged 6% (about $12) Thu after reporting “disappointing earnings. People were flying away from it by dumping its stocks but I’m thrilled about the plummeting share price. To me this is BUY, BUY, BUY opportunity! Am I losing my mind? Well, if you read my blog about how Buffett would like IBM stock to behavior or my yesterday’s blog on Schloss’ philosophy on value investment, then you should not be surprised about this reaction of mine. IBM is a great company, which you can hold forever for your retirement. But a great company does not mean it will not encounter hiccups from time to time. Just like a strong man who may also suffer from illness, any great companies may also suffer from temporary setbacks. However, as long as fundamentally they are sound, no worry whatsoever should a value investor have. Rather, such panic days should be the fantastic time for the value investors to buy. I won’t be surprised if Buffett is buying more of the IBM shares these days. My initial cost basis for IBM was $199 and it appears I’m losing money on paper. But I can tell you I have made much more money with my IBM positions in the past few months than the amount of the seemingly loss. I’m making money via 3 ways: IBM pays me an annual 2% dividend on a quarterly basis; I sell covered calls against my position every 2-3 months to earn more income; and I sell naked puts to make more income from it or buy cheaper stocks for more dividends. I’m simply happy and I think IBM is one of very few best value stocks out there at the moment, which are super discounted.

By the way, you may have known that 3 economists won this year’s Nobel Prize for economics. One of them is Prof Eugene Fama from Chicago University. His famous theory is the so-called Efficient Market Hypothesis (EMH). According to this theory, the stock market is highly efficient and the price of each stock should immediately reflect the fundamentals of the company. In other words, what you pay for a stock is what the stock is worth. Really? If this is true, then we should not have Buffett, Schloss, Rogers, and Soros etc who are the great masters to pick great stocks undervalued to beat the market. Ironically, one of Prof Fama’s brightest students, Clifford Asness, who practically did just the opposite of the EMH in investment and has become one of the richest men in the world. Asness left academia and joined Goldman Sachs for several successful years and then left Goldman and lunched his own hedge fund firm, AQR Capital Management. AQR is an extremely successful hedge fund, which has made Asness a billionaire. What he has done is simply to find the distorted prices (either too high due to irrational exuberance & complacence or too low due to irrational pessimism & panic)for companies when the market is out of its mind. Right now, IBM is exactly at this moment that the market is losing its mind to have dumped its shares. All you need to do is to hold your gut and buy more of it.

You probably have noticed that I’m talking more and more about value investment. Actually I have become obsessed to it. After almost 20 years in the stock market, I can say this is one of the best and most efficient way to make money with very little risk and without much attention needed. Also, there are so many different ways to further draw additional money out of it. FYI that right now I’m writing a step by step little guide book on value investment with dividend reinvestment. I’m thinking to present a model retirement portfolio in which a few value stocks could turn to over a million dollars after 15-20 years without additional  capital input and much attention. You simply hold them with dividend reinvestment. I have been over half way done and will publish it online. Will let you know when I’m done.

How to turn $10K to $12 Million

You probably have never heard of Walter Schloss, who was another Buffett type of great value investor. Even Buffett called Schloss a "superinvestor" in 1984. He managed a investment fund via Walter & Edwin Schloss Associates. From 1955 to 2002, by Schloss’s estimate, his investments returned 16 percent annually on average after fees, compared with 10 percent for the Standard & Poor’s 500 Index.

 

So what does that mean? Well, for that period of time, say in about 45 years, you could turn your $10,000 of initial investment with Schloss to a draw-dropping amount of $12 millions. All you need to do is to keep your money there and let it compounded at 16% annually.

 

You may think that Schloss must have used some sophistic technique to trade in and out high flying stocks to reach this staggering return. Nope and wrong! Schloss simply bought the highest-quality stocks at the right prices and held them for goods. If the price of those quality stocks fell, he bought more. In his won words: “Basically we like to buy stocks which we feel are undervalued, and then we have to have the guts to buy more when they go down.”  

 

It is a simple but very powerful strategy to become rich with investment.

 

Earn extra income like a pro

In the zero interest world nowadays, you virtually lend money to your bank for free if you keep your money in the bank. Savvy people invest their money in the traditional income assets such as bonds or bond-like securities, i.e. preferred stocks, utility stocks, and mortgage REITs etc. Yes, these assets used to be safer income investments but not any more. You see, the interest rate has nowhere to go but up, which will kill bonds and similar assets. Therefore one has to explore non-traditional ways to generate income. One way to do so is to write covered calls, an option strategy which is rather safe and effective for generating extra money. In a nutshell, you use your existing stock shares as a pledge to allow the other person to buy your shares at a pre-determined higher price at a later date, if the stock price goes to that price. In exchange, that person will pay you some money upfront. If the stock does not go up to that price by the expiration date, you keep the money free and clear. You can then make such a deal again and again. The worst case scenario? You sell your shares at a higher price after earning that extra money first. This is a technique professionals are using all the time for safe income, which can usually generate 15-20% income per year rather easily. But it sounds pretty complicated & daunting, doesn't it?

Well, you don't need to worry about the complicated technique anymore but can still enjoy the income strategy now. How? There are closed-end mutual funds or ETFs which employ such a low risk and high probability covered-call strategy,  called "buy-write" funds or "covered-call" funds. The fund managers will do all the dirty work for you to select the right stocks and write the corresponding covered calls. They then distribute the income via dividends, which are usually quite high. It is more attractive to buy such funds at the moment because they are trading below their book values, or at a discount to their net asset values. In other words, with one click away, one will not only enjoy the high dividend income, they may also get additional capital gain when the funds return to their normal values. Sounds a pretty good deal to me! I think the following 2 funds worth considering:
Madison/Claymore Covered Call & Equity Strategy (MCN) with a current yield close to 9%. The other one is BlackRock Enhanced Dividend Achievers (BDJ) with a current yield around 7%.

Of course, I cannot say these are risk free investments. Rather, they just offer you an easy way to explore another powerful income strategy, if you want to diversify a bit.

Follow Buffett's footstep for a great value stock

As I said, IBM is a great value company. At the current price around $185, it is deeply discounted and cheap, a valuation you don't often see. You should buy and hold IBM forever. By the way, the trade I talked about a few days ago has already shown me good money (up 30%). By the way, I used some variation for the trade by using $185 as the strike price with a bit more "risk" but to me it is no-brainer or free money anyway. Also, this is just my short-term income trade to juice up my long-term position of IBM.

 
Now, what Buffett thought about IBM? Well, Buffett considered IBM as one of Berkshire’s “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. He bought 63.9 million shares of IBM worth $10.9 billion in 2011. Since he liked it so much at the price and valuation, he purchased additional shares of IBM in 2012 and increased their position from 5.5% to 6.0%.

I guess you all would agree with me that Buffett is by far the most intelligent investor in the world. His wisdom is insurmountably valuable. When he talks, I listen, so should you. Instead of that I'm trying to convince you  about how valuable IBM is, let's see how Buffett talked about IBM in his 2011 annual letter. For such a great value stock, Buffett advised that one should wish for lower (languish) stock prices rather than higher prices, if he or she wants to keep it for long term.  See below (red highlighs mine) and you can read Buffett's full 2011 shareholder letter here.

 Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their operational accomplishments were truly extraordinary.

But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.

Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us. Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period? I won’t keep you in suspense. We should wish for IBM’s stock price languish throughout the five years.

Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%. If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1 1/2 billion more than if the “high-price” repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.

Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

This was easy money to make

As I predicted, the market did roar back: Dow Jones jumped more than 300 points and S&P500 shot up 36 points, both up over 2% today. This is a magnitude of daily increase not seen this year for the markets, a textbook of violent rally. If you did use the opportunity of yesterday's fall to get in the long position with SSO as I recommended, you would have made some quick money, 20%, 30% or even higher within a day, depending on the level you got in. How easy the money one could make, isn't?

Expect a violent market rally tomorrow

I cannot help but write a few words tonight. I think there is a good chance that the market will have a strong rally tomorrow. You see, the market has kept falling for over a week, more intensified lately due to the ongoing depressing government shutdown saga. The fear index, the volatility index (VIX) has jumped over 40% in the past few days to 20, a level not seen for half a year. The extremely bearish sentiment usually leads to a sudden reversal of the market. And there is potentially a great catalyst for the rally: the release of the September Fed minutes. This could be the good excuse for those who want to buy. After all, the Fed will not taper the QE and all the closed door talk within the Fed meeting 3 weeks ago could be interpreted as a good boost to the economy. At the end of the day, when the rubber band is stretched too much, it will snap back, although I don't think the rally will be long lived.

If you can watch the market actively tomorrow and ideally if the market goes down first at the opening, it would be a great trading opportunity to bet for a quick rally towards the closing. Buying SSO will be a great play for the short-lived rally.

When the market offers you free money

It is amazing that the market cannot stop offering free money to those who know how to collect. A couple of months ago, I presented the case to collect some free money from IBM: a few hundreds of dollars within 10 days. I just saw another opportunity for some free money. IBM has been in a range bound between $180 to $210 in the past 2 years or so. It is now at its low end again close to $180. So if you know how to collect the free money, you may simply sell its Nov 16 puts. One contract (equal to 100 shares) at the strike price of $180 would let you collect $470 as of today's closing. So in about one month time, you either get $470 free & clean if IBM stays above $180 by Nov 16 (most likely the case), or the worst case scenario you buy IBM 100 shares at $175.3, a 4% discount from today's price at $182 and start to collect its 2.1% dividends. You can further juice your income by covered calls. Cannot be a better deal and I cannot get enough of it! I don't have time to go into details and maybe over the weekend I may talk more about this that IBM is Buffett's favorite this year. I assume you cannot go wrong with Buffett for the long-term value investment.

Let smokers pay your retirement

I hate smoking, period. In my lifetime, I did smoke for curiosity when I was teenage but that was it. As I grew up, I have never touched cigarettes. Now I even feel disgusted when I smell it. But this does not mean you cannot make some money from the things you don’t like. Actually you can let smokers pay your retirement to some extent! You may ask, isn’t the tobacco industry a dying business and how can it be a good long-term investment? Well, indeed, ever since 1998 when a “Tobacco Master Settlement Agreement” was signed off, tobacco companies have been forced to pay billions of dollars in fines, facing tighter restrictions on the sale of tobacco and very high excise taxes. The US tobacco sales have been falling ever since. Nevertheless, the tobacco companies are still thriving and are paying investors tons of money year after year. How so? I think there are 2 major reasons:

·         Addiction is not something people can easily get rid of. Regardless how medically harmful that almost everyone should know of, when people become addicted to smokes, they cannot easily stop. They will more likely simply continue, even at the expense of paying increasing prices for cigarettes and decreasing physical health. This is especially true for young people as they don’t feel anything wrong yet about their health. The situation is much worse in the developing countries that smoking is much more prevailing and even is a fashion. Actually in many European countries like France etc, smoking is still a very popular habit.

·         Big revenue for governments which they cannot afford to not have. It is a dilemma for governments that on one hand, they want to restrict the development of the tobacco industry but on the other hand, they cannot simply let them go as financially it will be a life-threatening blow to the government, given the tobacco companies generate huge revenues they have to rely on. There was one funny example in the US: years ago, a tobacco company was fined by several state governments for billions of dollars. The company said, OK, it you did that, we would go bankruptcy. What happened? The governments backed off and let the company go without such a heavy fine!

Therefore, you can really feel safe to bet on tobacco company stocks in terms of retirement investment. As a physician, I definitely ask you not to smoke, but as an investor, I would highly recommend you to consider buying such stocks. They are very reliable, recession resistant and paying high dividends. I have got two tobacco stocks since 2008 (one I got for free), which I will keep for decades for my retirement.

I bought Altria (MO), the biggest tobacco company in the US, which markets top brands such as Marlboro, at around $22 per share. Not it is trading around $35, a nice over 50% capital gain in the past 8 years. The best part is actually its thick dividend: over 5% at the currently price. Since my original cost was only $22, my current dividend yield is actually 8%. MO has paid dividends for 44 consecutive years, with its dividends increased over 46 times. With this kind of dividend growth rate, I can easily enjoy over 10% dividends after a few more years. With dividends reinvestment, this could become a significant source of income for me when I retire. Even better, shortly after I bought MO, it span off Phillip Morris (PM), which is focusing on the international markets. I got 1 to 1 PM shares for free at around $55 per share. Now it is around $90 per share. PM is also paying great dividends with a current yield 4.3% that is also increasing every year. I’m extremely happy to have these two “sin/dirty” stocks in my retirement portfolio and hold them for years: I have accumulated quite a lot of additional shares of MO and PM respectively purely from dividend reinvestment in the past 8  years. This will only accelerate as years go by.

My weird hunch: Novartis marries Bristol-Myers Squibb

There is no inside information and there is no any talk I can find out anywhere that anyone is predicting that Novartis (NVS) may buy out or merge with Bristol-Myers Squibb (BMS). But I got a weird hunch that this may happen in the future. I feel that the marriage between the two has a strong strategic benefit for both, especially for Novartis. Not sure anyone knows that Novartis has already overtaken the No. 1 position from Pfizer as the biggest pharma company in the world in terms of sales. However, the oncology business for Novartis is still lagging behind Roche, which is still holding its No. 1 position with a very strong oncology portfolio. It is not a secret that Novartis is aiming to catch up and trying to become the No.1 as well in Oncology, although the bar is very high. While Novartis is doing very well in expanding its oncology portfolio in the past few years, it is still lacking the leading products in the sub-sector: immune oncology. This is the area where Roche is very strong, but the leading player is definitely BMS. After many years of setback for Bristol, BMY has definitely turned itself around with a great prospect! It has especially firmly established itself as the leading company in Immune Oncology after the approval of ipilimumab, the first ever immunologic drug in the world that is fighting against the cancer cells by boosting the body own immunity. Based on what I have seen about its amazing efficacy in some reports, I had a strong conviction that ipilimumab would be approved without any problem. For those who followed my blogs, we even made some money back then when ipilimumab got approved, a prediction based on my research knowledge on this product (see here and here). Ipilimumab, or brand name Yervoy, has been hugely successful commercially since then.

Now BMS has started off a new field of immunotherapy last summer with nivolumab, aiming a new target called PD-1 (programmed death protein 1). Their initial study  showed a 40% response rate for melanoma. It also reported an more than 80% reduction in tumor size in nearly a third of advanced melanomas over 12 weeks when used in combination with Yervoy. The speed and magnitude of that response quickly put Bristol-Myers as the front runner in the field with a Yervoy/nivolumab combination drug. With this in mind, I’m thinking that Novartis can have a great leap forward and firmly establish itself as the overall leader in Oncology, if NVS can buy or merge with BMS. Strategically speaking, I think there is a great value and benefit for both companies to do so when I’m trying to think like the CEOs of both. But of course I’m no body and the financially it is totally beyond me if it makes any sense, considering BMS is not a small monkey anymore; it will be very expensive for Novartis if they want to do so.

I’m just putting this out there for my own ego as if it turns out to be the true story in the future, I could be the very first one in the world to predict this! Ha ha...