Stock Throwdown

QID has been working fine, and I do NOT think we are out of the bear market. I know of no time that all indexes were down in bear market territory and the Fed increased the intensity of rate hikes. That being said, there are chartist indicators that the floor is in, so traders will push for another bear market rally. I have closed my short positions but will reenter them as the market climbs, probably switching to SPXS, 3X inverse S&P500. I believe we could hit 3100 on the index by Christmas. Buckle up. It's a rough ride.

I'm hopeful, but also pessimistic.

For about twenty years, we are in a neo-Keynsian financial world. Keynes theorized that 2% inflation was good because it forced money to be productive and that, at 2% of the money supply per year, that inflation would be the only tax needed. I don't think he ever foresaw how expansive government borrowing would become. Yet, the dollar is strong compared to other currencies because it's the best house in a bad neighborhood.

China lockdowns continue with no end in sight, so companies will have to move production to other countries, which may be inflationary because of higher costs. Our fuel issues are not resolved. We didn't have to declare war on oil, and have only touched the surface of that enviro-political football, but energy independence and 40/bbl oil would take a bite out of inflation without killing the housing market with high interest. Home builders are all hurting even though lumber is down off its highs. Restoration Hardware caters to the wealthiest among us, and has a buyback approved which they have not yet exercised. If they aren't buying, I don't feel bullish either.

This should be fun. 
Entirely possible IronHamster will be a better source.

Perhaps you know some basics, but I'll run through the conventional wisdom so other readers might get their feet wet.  Refused spouses that let their partner handle all the finances may need this kind of primer.

* Warren Buffett says he does not invest in any investment he doesn't understand. I do. I sank money in crypto currency and have lost half my money. Good thing I invested 0.1% of just one of my three IRAs in it. I buy stupid stuff, knowing I can lose it, but just piddly amounts. If you bought the same 0.1% a decade ago, you might be doing very well, which leads to...

* Buy on rumor, sell on news. This is a more useful axiom than "buy low, sell high", to which you might ask, "Well, duh! How?" The rumor is some early news of a business, product or service. You get the idea it could be profitable. Perhaps remarkably so. It's not discussed even in small groups. Bringing it up may spark interest, but no one says they've heard about it, unless they are a financial enthusiast or professional. This may include a small chain restaurant in your area that opened two new stores in rapid succession, you like their cuisine very much, and they've already gone public. You have faith that the whole country will like them as much as you do. You buy before the chain expands beyond your local area. I invested in five Linux companies in 2001 or 2002. I didn't know which would hit it big. One went under, three went private, the last one, Red Hat, was bought out by IBM. In 2002, no one but computer geeks talked about Linux. That was rumor. I sold my shares before IBM bought it. I had no interest in IBM at the time. I bought some recently though when I heard they were investing substantially in AI. AI is talked about, but not much about companies working on it. I figure Big Blue has a shot at being the source of the singularity in 2049. I sank 0.2% into it.

* I took a bath on crypto. I bought when EVERYONE was talking about it. That was news. Common, absurdly public, widespread news. Like Tulip bulbs. Or 2006 real estate. I bought anyway. I could not know whether the insane enthusiasm would hold and help my retirement, or collapse and clobber me. It was the latter. I bought some more Bitcoin and Ether through my account at Paypal. HOT TIP: Paypal lets you buy some crypto at nominal cost (in fees) and they worry about wallets, passwords, and security. I don't. They also offer Litecoin and Bitcoin Cash. I knew nothing of these and feel the ubiquitous popularity of Bitcoin and Ether make them the only likely winners. I would buy Dogecoin if I could, but not because I expect it to make money. Historical, whimsical reasons. Why'd I buy more crypto? 

* Dollar cost averaging. I acknowledge I might lose my shirt on crypto, and I did. After it sank 50% I bought more. I find it plausible it will bottom out again and again. Bitcoin is still a good concept and Ether is its environmentally responsible twin. I bought both and now my basis (the cost of my investment) is 25% lower than when I started. If I break even on my first purchase, I'll be up 50%. I sank the same raw dollar amount in the second batch, but bought twice as many Bitcoins/Ether tokens.

Snapchat?

Any thoughts? I know my 19- 20 something kids are on it non stop. Thoughts on what the stock is so cheap?

I just fool around on RobinHood with very small amounts. Just trying to “get my feet wet” doing these kids of things. I dropped a couple dollars into above suggestions - thank you guys.

Congrats on starting the process. The microinvesting capability of Robin Hood is a wonderful thing to eliminate much of the trepidation of investing.
Just start, and learn from (cheap!) mistakes.

I like that no one is talking about Snapchat now. (or are they? Am I out of the loop?) Did it occur to you just because you saw the kids using it a lot and asked yourself that? That'd be a good reason because it isn't "news". That can be observation that leads you to a good investment idea. If everyone if hot on something's tail, you can risk buying high and watching money vanish as people lose interest or early investors sell their formerly cheap shares to you at the zenith. 

What makes you say it's "cheap"? (Maybe it is! Let's have a look.)
finance.yahoo.com/quote/SNAP/profile/

I like how Yahoo statistics are organized. I'm used to it, I started with it, but many sites have similar number collections and ironhamster may have a better one useful to beginners and a great many of us are beginners. (Then again, some experts lose billions, so... the market can make fools of anyone)

First off, the Price is $10. Sometimes folks see a price per share and think of it as buying a commodity good like a tea kettle or pack of gum.
It's more like buying something like a cell phone. You can buy a $30 cell phone or a $1000 cell phone. We expect the pricier model to be capable of much more. Stocks are like that. Often that $1000 model isn't worth it. A model for $700 may be very nearly as good and have the features you need. It may last longer. It takes some research to see whether the priciest model is actually better.

Similarly, the $30 phone is cheap, but what if it cannot handle the current iOS or Android load? It will be vulnerable to hacking within months. Maybe that's okay if you buy another when that happens and $30 phones over and over may serve you very well. It's just that other people don't want to put that kind of work in.

Cell phones' cameras take pictures of varying quality, they have replaceable batteries (or not), they have battery life, they have wireless internet speed capabilities, and more. 

What do stocks do?
They earn money (profits/margin), they compete with similar companies, they give money back to investors (dividends), they borrow money, they invest in other companies, they accumulate cash, they sell goods and services, they provide reports about these activities of varying accuracy / honesty, and they grow.

Company growth typically refers to earnings. A company that loses a billion bucks one year, loses 300 million the next and loses a million last year may be seen by investors as a tremendous money powerhouse. It hasn't made a dime yet, but its growth is very good, as long as it shows reason why the trend will continue. Maybe it's losing less money because it's cutting back staff or selling off assets. 

One statistic that takes growth into account is the PEG ratio. Price/Earnings/Growth. Those aren't just slashes. Those are division signs. Price divided by Earnings divided by Growth.
A negative PEG means it has lost money since last year. This may be fine. Companies stumble for good reasons. A rule of thumb I've heard is a PEG below 1.0 is strong. 

A bad quarter of reduced growth (higher earnings, but not higher enough; so the growth has slowed downs) can send the PEG higher (less growth compared with price), send investors running, drop the price, and that reaction will lower the PEG back into a good price range and closer to "fair value", the price at which no one expects huge price moves up or down.

Used to love me some PEG.

SO what does the Yahoo stats page say.  "N/A"? Ugh. Hate that. It would mean I have to look somewhere with better financial info. I'd normally pass and look for something with numbers I can judge.  Previous PEGs have been 4 and 5. Well above the preferred 1.0

SNAP's price is either very high, or their revenue is declining/stagnant. Maybe the app's usage is declining.

Let's look at P/E. Price/Earnings. (Growth of earning is not taken into account by this simpler metric, popular with many people)
Last year, the P/E was 476. This gives me sticker shock. For every dollar you invested, SNAP earned a quarter penny. If this were a new stock, there might be time to do better. No, SNAP is a veteran. We need some reason to get excited again.

Over the course of a year, the P/E dropped by 10x. Did the price drop? Or did earnings soar? Well, June 2021, SNAP was at $68. In the thick of the pandemic, fooling around with phones was something people did a lot. Maybe their earnings were healthier, getting people to invest big and plumping that P/E to 476. People have heard of SNAP, so they bought it; a company they knew and liked. This is a common drawback to household name brand stocks. 
Now it's 2022 and people can leave the house again. Snapchat isn't the draw it was. It's trading at $10; 85% lower. The P/E is at 55; almost a tenth of its P/E a year ago. Almost all the drop was from price deflation. Earnings doesn't look to have contributed much.

The most recent P/E seems to say the P/E is now 2000.   
For perspective, critics of Tesla say it costs way too much at $800 a share. But it has opened two large production factories in Austin TX and Berlin Germany. That's a lot of expenses eating into revenue and lowering profits. It's P/E is 100. SNAP needs to substantially increase profits (How???) or lower it's price dramatically. (losing you money)
May want to check that 2000 PE. That seems enormous, but can happen if it basically broke even (made nearly no money). Price divided by earnings can be really really high if the number is near zero. It's just a trick of the math. A company that breaks even is still better than one losing money, all else being equal and plenty of companies are in the red in a given quarter. P/E is not the be all, and end all.

TSLA seems close to break even too. That can happen when you build multi billion dollar production facilities and pay very expensive brainiacs who study battery chemistry. Breaking even strikes some investors as incredibly promising. They are focused on growth, not earnings. They assume Tesla will make enormous quantities of money, even as they spend it lavishly on improvements and new products (full self driving could be a money avalanche about to happen).

TSLA's P/E was 700, now it's 100. The price is very similar since 6/2021. That must mean the earnings rocketed upwards. If that trend continues, TSLA's stock almost inevitably rises (but will the earnings continue upward? That's the risk.)

TSLA, costing 80 times more, is arguably cheaper than $10 Snapchat. You pay a lot more, but you get some features that may make it a good buy.

Last thing.
Companies lie. They say they have earnings they don't have. They sell massive amounts of product to a shell company they actually own and by moving revenue from one place to another claim sales they didn't make. They can layer debt on one subdivision then sell it off, appearing to have less debt than they do. Shenanigans.
www.sciencedirect.com/science/article/pii/S0970389617301891


Jeff Glassman in 2005 indicated that companies that pay dividends (sending a portion of profits back to shareholder accounts) don't engage in such tricks as much. It makes sense./ If you invent money, you cannot pay that money out. It must stay "on paper". Con men trying to get you to buy their stock by lying strike me as the kind of guys loathe to share any of the money they want for themselves or they feel their company needs with the lowly stockholders. Dividends are a sword of Damocles forcing management to actually look after the health of their companies. You don't waste time pretending to earn money. You need to earn it if you're obligated to hand some over.

TSLA is a poor choice in that regard since they have no dividend. You'll need to see evidence of revenue and earnings in other ways (e.g. product innovation and infrastructure development)

So, SNAP's P/E isn't great given stagnant revenue (growth), they offer no dividend so there's no demonstration of confidence that they'll continue to earn teh money that they do and can spare to give any away.

But maybe this is typical for tech stocks!
How's Instagram doing, for example?

Well, Instagram is owned by Facebook, now called Meta.
META's P/E is 15.  
META pays no dividend 
META's PEG is 2.0, but over the past year has been under 1.0 a number of times.

$170 META, at a glance, appears to be "Cheaper" than SNAP at $10.

There's a lot more factors one can delve into, but on the three very common metrics I looked at, SNAP appears a bit expensive to me, for what you get.


EDIT: Corrected one mistake. Slower earnings growth sends the PEG lower, not negative.  Ironhamster may find numerous corrections in this quick n' dirty guide. 
EDIT 2: Slower growth sends the PEG higher, not lower. A low PEG is growth and reflects higher growth compared with stock price. Because the calculation involves division, higher growth sends the PEG ratio down. How do I screw up the exact same stat twice? Stay tuned.



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