Nick's Opinion on the Markets

I must admit, I've been keeping my eyes relatively shut with regards to my portfolio and watchlists. Yes, I have less time to spare, but I think that my ignorance is mostly the result of the bipolar nature of the markets. I've lost some patience: some days the markets are up 5%, the next, they're down 7%. Fortunately for me, as you might remember from my post "To Invest or not to Invest", a long-term investor  needn't look at the markets on a day-to-day basis. However, each day now, I seem to find new opportunities despite the market's negativity.

First, there are a few industries that have done well in the face of the European debt crisis and the inherent risk of terrible recession. These include utilities, telecommunications companies, and the bigger tech giants of the NASDAQ. I can't say for sure why these companies have performed so much better in the past few months. I'm led to believe that the product offerings of the telecom and utilities companies are perceived as being more essential to their consumers. Therefore, consumers' spending habits won't change as drastically, even if they have less discretionary income. Is this the case for a company like Apple as well? I certainly hope that if someone has lost their job, or was recently made the victim of some kind of company pay-cut, they do not feel the need to purchase a $700 iPad. Assuming this is logical reasoning, companies like Apple and Google must be doing well because investors are not convinced that their growth will stagger as a result of poor economic conditions.

Personally, I'm paying closer attention to companies in the financial industry. Banks and insurance companies have taken huge hits, are attractively priced, and offer high dividends. Poor market conditions have forced these companies to record huge losses on their financial statements, but these losses are unrealized. Therefore, these losses are almost misleading with regards to the companies' actual performance. For example, Sun Life Financial is down more than 30% in the last couple of months. This means that the stock is now trading at a very attractive P/E of around 6, and that what used to be a 5% dividend is now a 7.5-8% dividend. With a market cap over $10 billion, the company isn't invincible, but one might argue that it's "too big to fall". So while a company like Sun Life is subject to the extreme volatility of the markets, it also offers an extremely attractive dividend that compensates the investor for unrealized losses with actual fixed income.

High-paying dividend stocks are really attractive for me right now because they're the only aspect of the market that I can feel sure about. I understand that the Board of Directors can easily reduce the amount of dividends paid, or stop them altogether. However,  the uncertainty regarding the BOD's decisions to declare dividends is minuscule compared to the uncertainties of the markets in general.

The Power of Social Media

What is social media? Facebook? Twitter? These are the companies/websites most people think of when we ask them about social media. Although these sites are some of the most powerful mediums of social media, we often forget about blogs, YouTube, LinkedIn and so many other forms of social media. Furthermore, we forget what kind of influence they have on our lives, and how useful they can be to businesses around the world. 

Facebook is a website that brings millions of members together to socialize with friends, share pictures, interact on each other's walls, etc. But Facebook is also an extremely attractive medium for any company to reach out to its clients. It's free advertising and it has the potential to reach out to a company's entire target market. This is because Facebook has incredible network effects, which means that it gets exponentially more useful, and powerful for every additional member on the site. 

Twitter is very similar to Facebook in that it also has network effects and it's free. Tweeting information and notifications is an effective way of keeping your clients, and the general public informed about your company's product offerings and promotions. Compared to Facebook, Twitter is limited with regards to features. However, unlike Facebook, Twitter has the potential to reach out to both followers, and anybody else who happens to stumble upon your account page. 

Companies are also starting to leverage websites like blogger. Blogs are useful for publicizing longer bits of news, seeing as bloggers do not have the 140 character limit that "Tweeters" do. However, blogs might not get as much exposure as a Twitter account might. 

LinkedIn is similar to Twitter, in that you can add friends to your professional network. However, LinkedIn is very business/professional-oriented and is not as effective for reaching out to clients. Rather, it allows its users to keep in touch with its professional network, facilitating the search for employers/employees, or even professional services. 

There are many other forms of social media that I could write about, but the point is clear: social media has given businesses the opportunity to reach out to a huge amount of people..... for free! Keep your eyes open for ad agencies that specifically deal with social media consulting. 

Chilly weather... I can handle that

I was walking to my car last night at around 7:00 from the Bronfman building. It was pitch black outside, and absolutely freezing.... and I was wearing a good jacket. A lot of people might pout and frown had they been in my predicament, as they anticipate the short days and the freezing temperatures that come with long Montreal winters. Despite my intense shivering, however, I managed a smile. My anticipations of the winter are much different than most people. Yours' would be too if this is what you thought of:

Winter means:
1.)Skiing! Skiing is arguably the best part of my winter. I ski at Tremblant every weekend. There is close to nothing that's better than an intense day on the slopes with friends, followed by an apres-ski beer/hot chocolate (pretty different options, but equally pleasing).
2.)Pick-up hockey: Playing hockey on an outdoor rink with neighbours and friends is a Canadian tradition. I've never played hockey on a team, but these pick-up games my family and I enjoy during our Tremblant weekends make me regret never trying out the sport competitively.
3.)Relaxing by an open fire after an active day outside. I know it sounds corny, but you know you love it.
4.)Winter break! Last year, because of the longer CEGEP winter break, i had about 5-6 weeks in December and January. At McGill, my break is 2 weeks. Regardless, I'm so excited to have time to do absolutely nothing. My workload has prevented me from just lounging on my couch to enjoy movies, books, and let's face it, videogames!! Last winter, I relived my youth, and beat the entire Donkey Kong 64 game from the very beginning of the game. This year, my goal is to get more to date and play all of the popular new releases like Gears of War. I should really start using my XBox 360 a little more.

Video Games, where have you gone??

I have a Nintendo 64, a Nintendo Wii, Playstation2, and an XBOX 360. I haven't used any one of these in the past 4 months. I used to be a Guitar Hero addict, a Madden fanatic, and a daily-craver of Zelda and Donkey Kong. I'd like to convince myself that the reason I don't play anymore is because I've grown up, and such childish things don't appeal to me anymore. After seeing the picture below, I had a sudden urge to try them all out!

file://localhost/Users/nicholasdigiorgio/Downloads/collage.jpg

I realized that I'm not too old for video games, I just don't have the time for them. You can be sure that I'll be playing during the Christmas holidays though. Hopefully my brothers ask for video games because there's no way I'm wasting my Christmas wishes on games. I'm too old for that... I think.

When investors think about tech companies, the first ones that come to mind are Apple, Google, Microsoft, etc. People often forget about video-game companies. Obviously, companies like Ubisoft, Activision, and Treyarch don't fall into the same exact categories as Apple. Their profits, however, are similarly generated from technological innovation. These companies are not only trying to improve their video game content, but they are constantly looking to take down the walls that separate gamers from the top sports venues of the world, or the medieval streets of Europe, to their own boring living rooms. Video games have evolved from the fun, childish endeavours of the N64 to the near real-life wartime experience of the Call of Duty: Modern Warfare trilogy.

The Back Workout

I started lifting weights when I was about 17. I was on the high school rugby team, and I thought that I should bulk up in order to be able to play more competitively. Today, I no longer play rugby, but going to the gym is one of my greatest hobbies nonetheless. When I can find the time in my busy schedule, I'll go work out for at least an hour. Unless you drop a weight on your toe, I have a hard time imagining a workout that leaves you in a worse mood than when you started. I always finish feeling amazing and feeling stronger. And even though I don't play any high-contact sports, I've really found that my increased strength over the years has made me a much better and more competitive soccer player.

Considering I'm not a very big guy, I mostly focus on mass building. This means that I tend to choose exercises that work out more than one muscle group at a time, and that I lift heavy, with lower reps, and higher sets. For example, during a bench press, I might lift about 155 pounds, 6 times for each set, with 5 sets in total. A toning exercise might be more focused on lifting much lighter weights, but many more times.

With mass building at the core of my workout routine, I thought I was seeing pretty good results. But after a while, your muscles get accustomed to the same workouts, and don't improve. Sometimes, I don't even wake up sore the next day (yes, I want that!)!

The other day, however, I decided to completely switch up my routine, focusing more on high rep exercises, and I was sore for almost a week. For any of you mass-builders who are looking for a bit of diversity in their workouts, here is the workout that I did that day. I was working out my back:
1.  Shoulder wide grip pull-ups - 3 sets x maximum reps
2.  Lat pull downs - 4 sets x 10 reps (last set, slow down your reps significantly)
3.  Standing rows - 4 sets x 8 reps (last set is a drop set with 6 reps for each set)
4.  Rows (on the machine) - 4 sets x 10 reps (second to last set is slow, last set is VERY slow)
5.  Cable rows - 4 sets x 8 reps
6.  Deadlifts - 3 sets x max reps with 155 pounds.

I didn't include the weights I used in this routine (save exercise 6) since anybody who would try this routine should focus on completing the prescribed amount of reps without sacrificing quality and form. Also, don't forget to actually slow down when the program tells you to! This is an extremely important component of the workout since it's a lifting concept that your muscles are not very used to.

Superbowl contenders

I've been a fan of the Green Bay Packers since I was about eight years old. When I turned eight, I went to Toys'R'Us and bought my first ever football video game: Quarterback Legends '97 for the Nintendo 64. On the cover of the game was a picture of the legendary Brett Favre; his arms were raised in excitement, and the green and gold 'G' on his helmet seemed to glisten. That year, Favre won the MVP award, and led the Packers to a Superbowl. He instantly became my favourite player. Even though Favre changed teams near the end of his career, I stuck with my Packers, and last year, the Packers Nation was rewarded with a Superbowl victory under the leadership of Aaron Rodgers; a young quarterback whose legend has only begun.

Nearly halfway through the 2011-2012 season, it's looking like the Packers might be able to pull off a repeat of last year. At 7-0, the team has the best record in the NFL. Their offence has no trouble scoring points, and if he continues this level of performance for the remainder of the season, Aaron Rodgers might have a great chance to win league MVP. With a QB rating of 125.7, he has shown the NFL that he is quite possibly the most dangerous quarterback in the league. Tom Brady comes at a distant second with 104.4.

Despite his 'second-place status' in QB rating, to leave Tom Brady out of any Superbowl equation is unwise. Firstly, he's got an uncanny ability to close games. While Brady is a quarterback with exceptional skill, it is his ability to win close games and his poise during the last minutes of the game that drive fear into the hearts of his opposing defenders. Secondly, as long as Bill Belichick is head coach of the New England Patriots, Brady and his team will always be Superbowl contenders.

Having played in three of the last six Superbowl finals, the Steelers also tend to be big contenders. With a record of 6-2, they lead the AFC. This team has consistently produced defensive powerhouses over the last few years, and this year is no exception. The hard-hitting black and yellow are always looking to give their fans reason to wave the Terrible Towel, and after losing in a tight Superbowl final last year to Green Bay, you can be sure that they're hungry for revenge.

Yes, there are other teams in the league that have had promising beginnings to the season, but the Packers, the Patriots, and the Steelers are really the hottest of the bunch. With another nine weeks of regular football to go, there's plenty of time for other teams to step up their game, and make it to my next post!

The Netflix Success Train

I was going to write about sports, but I felt that this post would be way more compelling! Not too long ago, during the summer, I looked into possibly investing in Netflix. In Canada, I had noticed that the company's brand power was growing. Consumers were being persuaded that the unlimited streaming of videos for $7.99 a month was a more attractive model than the Blockbusters brick-and-mortar DVD rental stores. A quick look at the company's statement of income also showed that revenues had been increasing by substantial amounts for many quarters.

Despite all this perceived value, one look at the stock price turned me off completely: around $250 per share. This represented a price per earnings multiple of about 61.5x EPS. Clearly, I wasn't the only one that thought the company had potential for growth. I was convinced that the high valuation was the result of speculation, and did not necessarily represent the fair value of the stock. I thought that the price would have to come down one day, and the door would be open for value investors to reap some of the success of this amazing company.

Alas, Netflix has made some interesting business decisions of late, and their share price has taken a hit. Today, the stock closed at $79.40 on the Nasdaq. That's a 74% decrease from their high of $304.79 in mid-July. What caused such a drop? Realizing that the company's future lies primarily in online-streaming, rather than DVD direct mailing, Netflix had decided to launch a new, separate brand, Qwikster, for its DVD mailing service. This move was not looked at favourably by investors, and Netflix immediately retracted this idea. The damage was done, however, and the brand reputation has some lost ground to recover now. To make matters worse, the company lost 800,000 subscribers in the third quarter after a price increase was implemented for the DVD end of the business.

Most people would consider this bad news, but I see it as an opportunity. The share's P/E multiple is now at about 18x EPS, which is in line with a more "average" growth stock. However, considering Netflix has only begun to expand to the international market, there is so much more potential for Netflix to succeed, in comparison to the "average" growth stock.

Netflix will expand to Ireland and the UK in the first quarter of 2012 and it will continue to invest in its growing operations in Canada and Latin America. The company predicts losses on the international playing field for some time because of high marketing costs, and investment costs related to the purchasing of licenses to stream material. In my opinion, Netflix will recoup this investment, and be rewarded handsomely for years to come. Netflix has demand-side economies of scale, which means that the more subscribers the company attracts, the more value it can deliver to each customer. Once a customer base is established internationally, more and more consumers will be attracted to Netflix, and the company's growth will catch like a flame.

Another obstacle for Netflix' success is their streamable content. One of the company's biggest strengths is its massive library of content. But licenses for streaming seem to be harder to come by than the DVD counterpart. Some licenses are held exclusively by competitors, and it's also possible that some studios avoid selling licenses to Netflix because they are worried that the company will become too powerful. Despite these difficulties, Netflix continues to invest aggressively in their content library, and it seems that the company's libraries will only continue to expand.

All this to say that despite the significant devaluation of its share price, Netflix still has so much to offer consumers around the world, and its international expansion has only begun. For investors, this could be an amazing opportunity to get on the Netflix success train for cheap. If things don't go so well at first, be patient, and remember that this company has great potential to deliver on the long-run.