Category: Stock Market

Continuation from Friday…..

FUNDAMENTAL ANALYSIS:

In order to establish a clear picture of what had happened between 1999 and today we must first analyze the fundamental growth of the company over the last 15 years.

Key Statistics	2000	2014
Price Per Share	$1	$77.70
Market Cap	$39 Million	$3 Billion
Earnings Per Share	$(1.47)	$3.17
P/E Ratio	N/A	24
Price/Sales Ratio	0.08	2.04
Price/Book Ratio	N/A	10.3
Revenue	$478 Million	$ 1.14 Billion
Net Income	$(15 Million)	$124 Million
Annual Earnings Growth	4% (revenue)	39%
Total Cash	$34 Million	$90 Million
Total Debt	$ 354 Million	$580 Million
Book Value Per Share	$N/A	$5.81
Shares Outstanding	39 Million	39 Million
Total Assets	$351 Million	$1 Billion
Shareholder Equity	$(51 Million)	$120 Million

As we look at the data above, one issue becomes immediately apparent.  Just how much out of shape the company was back in 2000. And not just in 2000, between 1996 and 2000 the company lost a net total of $170 Million. A massive loss considering the company had a debt load of $354 Million, negative equity and a market capitalization of just $39 Million. In other words, at least from the financial statements perspective alone, the company was dying.

Further, while Bally’s financial performance had improved considerably between 2000 and 2014, this improved performance hardly justifies the 7,800% rise in its stock price.  With the revenue base growing at just 138% over a 14 year period of time and with the shareholders equity expanding by just $170 Million, it becomes puzzling how Bally’s market capitalization could have expanded from $39 Million to $3 Billion. Finally, while the company was selling at depressed valuation levels throughout 1999 and 2000, with a Price/Sales ratio of 0.08, it not entirely evident if this simple turnaround is what had caused the company’s stock price to expand by 78 bags

We must now go back into the 1995-2000 period and study the company in greater detail in order to determine why the company was underperforming,  losing money and on a verge of a financial collapse during that time. Further, we must ascertain what the company did between 2000 and today in order to turn things around. If this improved performance could have been anticipated. Most importantly, we have to figure out if we would have been smart enough to take a long position in either 1999 or 2000.

To Be Continued Tomorrow…..

How You Could Have Made A Fortune Gambling  Google

Company Name:  Bally Technologies Inc	Stock Symbol:  BYI	Industry:  Gaming
Percent Appreciation:  7,800%	Number of Bags:  78	Holding Period: 14 Years
Entry Date & Price:  October, 2000 @$1.00 share	Exit Date & Price: August,2014 Takeover @ $83.30	Original Investment($10,000): $780,000

Company Description: Bally Technologies, Inc. is a diversified, worldwide gaming company that innovates, designs, manufactures, operates, and distributes advanced technology-based gaming devices and systems, as well as interactive and mobile solutions.  As a global gaming-systems provider, we offer technology solutions which provide gaming operators with a wide range of marketing, data management and analysis, accounting, player tracking, security, and other software applications and tools to more effectively manage their operations.  Our primary hardware technologies include spinning-reel and video gaming devices, specialty gaming devices and wide-area progressive systems for traditional land-based, riverboat, and Native American casinos, video lottery and central determination markets, and specialized system-based hardware products.

Quick Trading Overview & Objective: While Bally Technology’s stock price has appreciated only a little over 300% since first going public in 1982, we will begin our analysis at a multi decade bottom that had occurred in 1999-2000.  Bally’s stock price hit bottom in May of 2000 at around $0.42 a share before staging an impressive 20,000% rally (a 200 bagger) between then and the January of 2014.  We will initiate our coverage at this 1999-2000 bottom of around $0.40-0.50 a share (split adjusted) in order to see what had caused the company to appreciate over 7,800% between 2000s tradable bottom and today.

We will go back in time and take an in depth look at the company in order to determine if we could have taken a long position at that time. More importantly, we will look at Bally’s fundamental and trading patterns over that period of time in order to ascertain if we would have been able to maintain our position over a 14 year period of time and/or until the takeover bid for Bally’s Technologies was announced on August 1st, 2014 by Scientific Games Corporation at $83.30 a share.

To Be Continued On Monday…….. 

Let’s Play A Game Google

Continuation from yesterday…..

CONCLUSION:

Chipotle Mexican Grill (CMG) presents us with a perfect case study of what to look for in potential Tenbaggers, when to take position and when to exist.

One of the things we have learned right away is that it wouldn’t be a wise decision to take a position in Chipotle’s stock right after its IPO in January of 2006. That was due to our inability to determine the stock’s structural trading patterns, price doubling at the open and subsequent excessive valuation levels.

Yet, the stock presented us with another buying opportunity at the end of 2008, when the company’s stock price declined 75%. At that time, Chipotle offered us a perfect Tenbagger investment opportunity for the following reasons.

• Fundamental: Even though Chipotle’s stock collapsed 75% in the midst of the 2007-2009 financial crises, the company itself was doing incredibly well. Opening over 100 new stores, improving margins and growing at 25-30% per year.  What’s more, for the first time since going public, Chipotle’s valuation metrics were not too expensive.
• Technical:  After establishing a clearly defined down trending channel between its 2007 top and its 2008 bottom, Chipotle’s stock broke out of this channel in the late November of 2008 at $42.20, giving us a clear signal to take a long position.
• Timing:  An analyst aware of the overall structure of the market would know that a bear market mid cycle leg would terminate in the early 2009. This information alone would ensure that an analyst who was following Chipotle’s stock would be watching closely for an anticipated technical bottom.

It is not often that we get all three disciplines confirming each other.  Yet, when we do, it becomes increasingly easier to take a position as the risk/reward profile clearly benefits an investment. Just as was the case with Chipotle’s stock in November of 2008.

Finally, not only did Chipotle’s stock present us a perfect case study of when to go long in a potential Tenbagger, it also teaches us when to get out. As is the case today.  Making Chipotle’s stock a perfect financial instrument to follow over the next few years.  With an ability to profit on the short side before reversing course at the next bear market bottom to benefit from the next leg up. Perhaps just in time for the next Tenbagger run.

Final Prescription: Fundamental Analysis + Technical Analysis + Timing Analysis = A Massive ROI.

How Many Burritos Does It Take To…… Google

Continuation from yesterday…...GETTING IN AND OUT OF THE STOCK

As you very well know and as was suggested before, taking a trading/investment position in a Tenbagger at the appropriate time is only half the battle.  Staying put, increasing your position and not being forced out to sell at the wrong time is the other side of the coin. After all, it wouldn’t be a good idea to take a 100% profit, only to see your stock go up another 20,000% over the next decade. As human beings we are wired to buy and sell at exactly the wrong time. Hence the inability to outperform the market.  When it comes to Tenbaggers we must have a clearly defined set of trading rules that will help us mitigate the risk of being wrong (Please see the Tenbagger Trading Rules & Maximizing Returns chapter).

Yet, it is equally important to know when to get out and when to go short.  In order to protect your profits and to profit from the stocks subsequent decline. In the case of Chipotle, today’s valuation levels and the overall macroeconomic setup present us with a unique opportunity to look at the other side of the coin.

Even though the stock price has appreciated close to 1,500% over the last 5 years and even though the company is performing incredibly well on the fundamental level, Chipotle’s stock is in a very dangerous territory. For a number of reasons.

First, the valuation itself. With a P/E of 62, a P/S ratio of 5.66 and a P/B ratio of 11.70, Chipotle’s stock price trades at levels typically reserved only for extremely fast growing and incredibly profitable tech companies. And while the company is executing very well, today’s price offers no room for a single misstep. In other words, even if the company continues to grow at 25-30% per annum, its stock price today offers very little further upside and way too much risk.

Second, the overall stock market is in a bubble territory as well.  Just as it was at 2000 and 2007 tops. Suggesting that a significant correction is just around the corner.  Typically, when such corrections develop we can anticipate overpriced stocks such as Chipotle to decline at X multiple to the overall market. For instance, when the Dow declined 55% between 2007 and 2009, Chipotle’s stock price declined 75%. Giving it a 1.4X multiple. Suggesting that if the Dow is to go through a 30% correction between 2014 and 2017, Chipotle’s stock could decline as much as 40-50%.

When we put two and two together, it would make perfect sense for investors in Chipotle to exit the stock at this time and to consider going short once the breakdown confirmation is received.  In fact, looking at the chart alone, if the overall stock market is to correct over the next few years as some of my other forecasts suggest, it is highly probable that Chipotle’s stock price will retest its 2012 low of $243. That would mean a 64% collapse in its stock price and within a relatively short period of time.

This presents investors in Chipotle with a unique opportunity to A. Sell at the top B. Profit on a short side of the trade and C. To enter Chipotle’s long side at a much better valuation level at a later point to benefit from the subsequent bounce.  Once again, this concept will be further reviewed in our Tenbagger Trading Rules & Maximizing Returns chapter.

To Be Continued Tomorrow……..

Is It Time To Short Burritos?….Almost  Google

Continuation from yesterday…….TIMING & MATHEMATICAL ANALYSIS:

As was suggested earlier in the book, both the overall stock market and individual stocks tend to move according to their own cyclical compositions. A number of cyclical examples were given, including a 5-year and a 17-18 year cycles. Showing that the stock market moves in clearly defined patterns.

While it is certainly possible to identify the internal mathematical structure of almost every financial instrument, a long trading history is a must.  In the case of individual stocks, a 15 to 20 year trading history is necessary. Anything less than that would not yield appropriate results.

Since Chipotle’s stock first started trading in January of 2006, it would have been impossible to ascertain the stock’s internal mathematical or timing composition by either 2008 or 2009. Even today.  Yet, despite our inability to figure out what the stock itself would do, we did have the next best thing available to us. The overall stock market.

As Chipotle’s stock price was collapsing in 2008, so was the market. In fact, between October 11th, 2007 and March 6th, 2009 the Dow declined close to 7,500 points or 55%. A massive mid cycle collapse reminiscent of the 1972-1974 and 1907-1908 declines. An analyst working with the overall cyclical composition of the market would be aware of the following facts at the time.

1. The overall market is tracing out a 17-18 year secular bear market that started in 2000.
2. The 2007-2009 bear market leg represents a mid cycle collapse where 50% or more declines are typical.
3. The bull market of October 10th, 2002 to October 11th, 2007 lasted exactly 5 years. Suggesting that the upcoming mid cycle decline would last 1.5-2 years.
4. Mid cycle bottoms are typically followed by either a 2-year or a 5-year bull market runs.

In other words, an analyst working with the mathematical and cyclical composition of the stock market would have had a very good understanding that the stock market was likely to hit a bottom in the early 2009, followed by a strong rally. This was further confirmed by a number of other indicators converging on March of 2009 as a high probability turning point.  Once again, the methods of analysis that have lead to such a conclusion can be studied further in my other book Timed Value.

When it comes to investing in Chipotle, this type of an analysis would have been of great help for a number of reasons. First, we would have realized that Chipotle’s share price is likely to stage a strong recovery if the market was to turn around and to stage a multi-year bull market rally. Since no fundamental reasons, outside of general overvaluation, existed for the company’s stock price to decline, it would have been logical to assume that Chipotle’s stock price would recover as soon as the market does. Second, the company was growing at a rapid pace despite the economic collapse and was now selling at a reasonable valuation. Finally, an analyst familiar with all of the above would be watching the company’s stock for a clear technical bottom and a confirmation. With a clear intention of purchasing the stock once the confirmation was obtained.

This confirmation was obtained during the 3rd week of November when the company’s stock broke out of its down trending channel at around $42.20. A long position should have been initiated at that time.

The result? 

Chipotle’ stock price had appreciated 1,465% (14.7 bagger) between its February of 2008 bottom and today.

To Be Continued Tomorrow…….

How You Could Have Been A Burrito Kingpin Google