Tuesday, December 1, 2015

Prognosticating, Five Years Later

Predicting the financial future is no easy business!

In 2011, Steve Tobak with CBS Moneywatch, put together a "list" article of "10 Big Brands in Big Trouble".   Some of these on his list are no-brainers.   Radio Shack?   It is a zombie company - whose death has been predicted for nearly a decade now.   Others, such as Sears, are notable for being missing from the list.

But five years later, I wonder whether his predictions have come true.  So I thought I would check out his list and see what has happened in the interim.

Now bear in mind, I am not taking a piss on Steve here.   Just pointing out that making predictions about the future is an uncertain business.  And when you make a prediction about the future, well, you are putting yourself out there, and later on could be ridiculed for your remarks.

I could have assembled a similar article about any prognosticator with similar results. What I am trying to do here, is point out how stock picking is indeed for chumps, as we little people cannot predict the future with any certain accuracy.

From the article:
1. American Airlines
While United, Delta, and other major carriers have declared bankruptcy and emerged stronger as a result, American has managed to negotiate major union concessions and stay afloat, but not without a mountain of debt and pension obligations. How long can AA continue to operate in the red? With $17.1 billion in debt, it's really only a matter of time. Shareholders are nervous - parent company AMR's share price is down 75% this year.
This one he appeared to get wrong.  Since 2011, American merged with USAir to form a new AAL, and the stock price has risen from $25 a share to about $41 a share.   The P/E ratio is 5.88 which is astoundingly low for an airline stock.   It has a dividend yield of 0.97% which is low, but then again, any airline that is making money and paying dividends is doing pretty well.  The D/E ratio went from a -3 to a staggering 8.5 in 2014 and is now down to a fairly high, but manageable 5.5.

So, I would have to say he called this one wrong.   He prediction that "it's really only a matter of time" turned out to be wrong in an era of airline consolidation and mergers.  But who could have foreseen the merger?   Exactly my point.

2. Research In Motion
The pioneer of the once-invincible Blackberry has become the third company in a two-company smartphone race between Apple's iPhone and Google's Android platform. Not only that, but RIM has also botched the all-important tablet phenomenon. How did that happen? Co-CEOs Mike Lazaridis and Jim Balsillie are the likely culprits, but RIM's board is standing behind its co-leaders, although the stock is off 70%, year-to-date.
RIM, or Blackberry is another "no brainer" call. Their share of the smart phone market is infinitesimal.  However, they do have some software products that are embedded in a number of applications, and that continues to make money for the company.   However, the share price has tumbled from $60 to $6, and the company continues to lose money - for how long, is anyone's guess.   He called this right.   I suspect he also said the sun would rise in the East.

3. Sprint
When I first called Sprint a failing turnaround nearly three years ago, readers took me to task because I didn't give CEO Dan Hesse enough time. Well, the company has reported losses of nearly $9 billion since then, the stock's still sitting near an all-time low, and now, Hesse is "betting the company" by committing to buy over 30 million iPhones over the next four years. What a mess.
What a mess indeed.  From $6 a share back in 2011 down to about $3.50, with negative earnings.  UPDATE:  Merged with T-Mobile in April 2020 and is still going, sort of, I guess.  Somebody made money on that deal, I bet.

4. AOL
The media giant that once all-but owned the internet and bought Time Warner for $160 billion, went public again in 2009 and promptly fell off a cliff. Revenues have since declined sharply, losses are piling up, and the company's market value is down 50% from its IPO to a paltry $1.2 billion. CEO Tim Armstrong's latest strategy du jour is web-based video. How the once-mighty do fall.
By 2011 when he wrote this, AOL was a long, long way from its heyday.  So looking back to 1995 and going "tsk, tsk" is sort of stupid, in my opinion.  The question for investors in 2011 was, is this company doing anything NOW to make money?  They had already transitioned to a content company and were making money at it.

Verizon just bought AOL, in order to expand its digital content.  The stock in 2011 was trading at about $15 a share.  It was trading recently as high as $52 a share, with the buyout set at $50 a share.   AOL was actually making money, albeit with a P/E ratio as high as 30.

Once again, mergers and acquisitions can throw off even the best (and what seems like the most obvious) prognostication.

5. Kodak
Over two years ago, I called Kodak what it was: a mid-sized company organized like a behemoth. I also said I didn't think CEO Antonio Perez had what it takes to turn the company around. Since then, the company has bled over $1 billion of red ink while revenues flat-lined and debt piled up, all of which sparked bankruptcy fears and a precipitous plunge in share price to an all-time low last Friday.
Good call here, as Kodak declared bankruptcy in 2012.  A new Stock has been floated, but it is down by more than half, and the new Kodak continues to lose money. They claim to be going into cryptocurrency or something, which sounds more like hype to gin up the stock price.
6. HP
Since firing turnaround CEO Mark Hurd, HP has truly lost its way. The board hired Leo Apotheker, who had previously been fired by SAP, and the former software exec attempted to remake the world's largest technology company into a second-rate software firm, announcing that HPs $41 billion personal systems group is on the chopping block. The board pulled his plug a few weeks later, then promptly installed Meg Whitman as CEO, even though she has no enterprise, IT, or turnaround experience. Legendary VC Tom Perkins says HP has "the worst board in business history." He may be right.
This is another one that seems like a no-brainer.  If you are an Engineer, the tortured history of HP is enough to make you weep.   We all cut our teeth on HP instruments (oscilloscopes, for example) and computer data acquisition systems.   The company tried to transition itself into a printer and computer company, but the market for hardware became very competitive as hardware became a Chinese-made commodity item.  Most famously, one of the former CEOs of HP, who helped run the place into the ground, is running for President, citing her "business experience" as a plus.   Ouch.

The stock has been on a roller coaster ride, trading for about $20 in 2011 to the low teens today, hitting as little as $6 along the way.  But oddly enough, it has a positive and respectable P/E ratio of 5.06, EPS of $2.48 and a dividend yield of 3.93%.  As of October, the D/E ratio is an astoundingly low 0.883, meaning there is more equity in the company than debt.

So maybe this turnaround thing is working?   I guess we'll have to stay tuned to be sure.
7. Sony
Sony's a real mess. After implementing an ill-conceived, grandiose vision of becoming a global media empire, the former king of consumer electronics has lost $4.5 billion over the past three years and its stock is trading at a 25-year low. The Japanese company needs an IBM-style turnaround, but first, it has to get rid of CEO Howard Stringer, find a Lou Gerstner clone, and figure out what kind of company it should be.
Sony used to make radios and televisions. Not great radios and televisions, but durable ones. Audiophiles generally shied away from Sony equipment. Their biggest products it seems today are Playstation and their movie business. The most famous thing you hear about Sony is how they were legendarily hacked.

But taking all that aside, is the company profitable? The stock price has roller-coastered from $36 in 2011 to $26 today.  It has a dividend yield of 0.92%  Earnings have been up and down - losing money in 2014, earning money last quarter.   Some prognosticators estimate positive earnings for 2016.

Hard to call this one.  The company's earnings are volatile over the last five years, but looks poised to turn around in 2016.   But, that would be prognosticating.
8. Yahoo
The pioneering internet portal has been adrift ever since the board let CEO Terry Semel go in 2007. Jerry Yang was a disaster as CEO, botching a Microsoft acquisition that would have been a shareholder coup. While Carol Bartz didn't flame out quite as badly, she never did get the hang of things and was fired last month. Still searching for a new chief, rumors of a possible takeover bid involving private equity firm Silver Lake, Russia's Digital Sky Technologies, and China-based Alibaba, just surfaced.
Yahoo is an interesting company.  They missed a chance to sell out and make money, and while once a popular e-mail portal, first Microsoft and now Google have largely taken over that space.  If you have a Yahoo account, chances are, it's been hacked by now.

Today, Yahoo's specialty seems to be in posting click-bait articles and "list" articles like the one being reviewed here.   Like AOL, it has become a content company.

But oddly enough, the share price since 2011 has more than doubled, and in fact, almost tripled at one point.  With a P/E ratio of over 100, it isn't that profitable, but then again, it is amazing it is profitable at all, ain't it?

If there is any value at all in this company, someone must see it making money down the road, or as a potential buyout (like AOL).

I would say that Mr. Tobak may have called this one wrong.
9. Radio Shack
Five years ago, Julian Day - the executive credited with saving Kmart - became CEO of Radio Shack. The electronics chain relic with thousands of tiny stores that sold all sorts of odds and ends had become stuck. Revenues and profits were going nowhere. After an ill-fated rebranding as The Shack, the company's still stuck, Day is out, and CFO Jim Gooch is in as CEO. Without a major overhaul of its strategy - like actually having one - this company is destined to slowly fade into oblivion.
Another no-brainer, and everyone - including myself - have been writing the epitaph for Radio Shack for some time now.   What the fuck is taking so long?  Just die already, Grandpa!

But there is apparently life after death - or maybe we'll see.  The Shack declared Chapter 11 this spring, and the stock was trading for pennies a share.  The company was sold to a hedge fund in bankruptcy court.  Where it goes from there is anyone's guess.

For the investor, of course, it would have been a bad buy.  Now, if Sears would just do the honorable thing and just topple over.....

10. AMD
Nearly four years ago, I called AMD the tech industry's longest running roller coaster because the stock goes up and down but, after a quarter century, ended up in roughly the same place. Today, it's down another 40% or so. Not only that, but after playing a distant second to Intel for all those years, the microprocessor company has completely missed the smartphone and tablet transitions, rendering it more poorly positioned than ever before. The board hired a new CEO in August, Rory Read from IBM-spinoff Lenovo. Good luck. 
AMD was once a viable competitor to Intel, back in the days of 386 and 486 processors.  Back then, you could buy an AMD version of the Intel chip - for less money - and simply plug it into your motherboard (which you bought from TigerDirect online!) and make your own computer. Today, people buy computers pre-assembled and processors have taken leaps in terms of complexity, speed, and processing power.

The market is not bullish on AMD.  The share price toppled from $8 to $2 a share since 2011, and earnings per share are a negative $1.19.   Whether AMD can weather this storm and reinvent itself in a new market or come out with a new product to boost sales, remains to be seen.  The company had positive earnings as late as 2014.  But analysts are expecting more negative earnings for 2016 at least.

Maybe Mr. Tobak called this one right, although the company isn't quite dead yet.  Time will tell whether they can turn the company around or re-invent it.  In the tech sector, this has been known to happen!

UPDATE 2020:  In the semiconductor business, you are only as good as your last product.  AMD has rebounded with a bang, going from $2 a share to $90 today.  It's all about the products - and perhaps some mis-steps by your competitors....

* * *
So, how did our prognosticator do?

Well, three of the ten stocks (AAL, AOL, YAHOO) are worth more today than they were in 2011, and the companies appear to be doing well.

Two went bankrupt (Kodak, Radio Shack) and were clearly losers to everyone at the time.

The remaining five are a mixed bag.  HP has a lower share price, but good metrics.  AMD is losing money still but the jury may be out on that.  Sony has been up and down, but not a clear failure - yet.  Sprint and Blackberry are likely losers, but have yet to topple.  I suspect both may be the subjects of buyouts in the future.

So what does this tell us about stock picking, about stock gurus, and "list" articles on the Internet?

Well, without a working time machine we can't predict the future.   And while most of the stocks on this list would have been bad bets, unexpected things, like buyouts and mergers, can turn things around in a real hurry.

Recall that Apple was pretty stagnant when it introduced the iPhone, which was not an immediate hit.   Nintendo was written off as last-year's news, until it came up with the Wii, which turned around the company, at least for a while.

The bottom line is, for the amateur investor, it is nearly impossible to understand all the metrics and operations of the underlying companies we invest in.   And even for financial journalists, it is a difficult task.

The only answer?  Diversify.  Betting on individual stocks is just a form of gambling, and gamblers, particularly amateurs, usually end up losing their shirts.