Key Posts from the first 1500, #3

Investment Analysis Clubs Saul’s Investing Discussions
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This was another of my initial posts, #7 on this board - http://discussion.fool.com/a-thought-that-i-had-on-investing-phi… . It’s on the subject of multi-baggers. I included some relevant comments on the same subject from post #66.

Saul

I pay no attention to 2-baggers, 5-baggers, 10-baggers or whatever in individual stocks, nor do I count them.

This is relevant because this way it never crosses my mind to think anything like “This stock is slowing down, but it’s a 9-bagger. Maybe I should hold it for another year to try for another 10-bagger.” Going from a 9-bagger to a 10-bagger is only an 11% gain, so counting 10-baggers is meaningless to me. If I’m no longer in love with the stock, I should be able to put the money into something that will be up 30% in a year, and it will never even cross my mind that I missed having a 10-bagger.

What I do pay attention to is how my total portfolio is doing. When I multiplied my results out from 1991 to 2007 it came to a 115-bagger on the whole portfolio. That’s what is really important to me, since my family and I have to live on the gains.

Here’s another way to think about it: If you have an 80-bagger on a stock that grows to an 85-bagger it sounds exciting, but it’s only a 6% gain on your money. If you take the same money and put it into a new stock where you just get a tiny little 2-bagger, you’ve made a 100% gain on the same money.

Which is why I don’t pay attention to trying to get multiple baggers. If they happen, it’s fine, but it’s not my focus.

If you were to put a small amount of money in every stock listed on the NYSE and the NASDAQ, in other words, every stock in the markets, you would eventually pick up every 10-bagger, even every 100-bagger, that occurred. You’d be able to brag “I have fifty 10-baggers now, and three 100-baggers!” But so what? You’d just be doing as well as the markets as a whole, by definition, as you were investing in the whole market. And since you just invested about a hundredth of one percent in each stock, your 10-baggers would be meaningless, and even your 100-baggers would only move your totals 1%.

So again, anyone can pick up lots of 10-baggers by just investing in hundreds of stocks. You’ll probably have more if your hundreds of stocks are MF picks, certainly, but the multi-baggers are irrelevant. What matters is how your total portfolio has done. If you have ten 10-baggers in 25 stocks, that’s darn good. If you have ten 10-baggers in 500 stocks over a number of years, so what? You could still have mediocre results overall!

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Here’s another way to think about it: If you have an 80-bagger on a stock that grows to an 85-bagger it sounds exciting, but it’s only a 6% gain on your money. If you take the same money and put it into a new stock where you just get a tiny little 2-bagger, you’ve made a 100% gain on the same money.

And this is the modus operandi that I have been noticing when you post your changes and portfolio positions. You move very fast and although not unerringly, you correct any slow movers even faster. Your conviction in making changes is awesome so I have some questions.

Do you pay any attention to portfolio turnover? Using CALL as an example, have you sold this stock or are you still in it? At what point do you decide it’s time to move on?

Regarding CALL, I have set a rough date in my mind that I believe is reasonable for the company to correct its problems or have it’s premise work out. If it disappoints, I intend to sell, but of course, it’s a judgement call at that point.

Again, for example, I’m watching CALL closely. Now it’s a law suit that did not affect the stock’s drop from $22 to $15 yet may be keeping the stock down. Only time will tell and for CALL, I have determined that sufficient time is around 3Q earnings, which gives their marketing plan a chance to prove it is a good one and also, time to build up their App customers. Does that sound like the type of reasoning you use to make a buying decision? Would, in this instance, 3Q be sufficient time for their premise to work out?

As always, Gracias so much for sharing,
Mykie
PS I read my first and a recent 10Q or 8Q (I’ve forgotten which one it was) on KRED. I can’t say I drew any conclusions from it other than to say the financial structure that they have set up confused me. They apparently have a pool of money available to them via allowing future stock purchases from private individuals up to 9.99% of the company, and from as far as I can tell, at good value. So much at .65 so much at .81 and some around .50 per share. So I walked away from that read thinking they have enough money to pursue greater distribution but whether that structure was in the best interests of we shareholders, I generate absolutely no opinion.

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Mykie, I’m thinking about CALL the same way as you. Their new marketing push and products come out at the end of June, beginning of July, so I’d figure 3rd quarter report should give us an idea. I don’t see much downside as it only has a PE of 5 or 6 as I remember, however I could be wrong about the downside of course.

Saul

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Saul & Mykie

I agree that q3 report should show some indication of future direction of the company. Having said that, what is your opinion of the patent law suit? netTalk (NTLK) is a tiny company with 6.61m market cap. Call could have bought it with 100% premium for 13m and change. From that perspective, the risk from the law suit should be manageable for CALL.

But clearly the street disagrees. The share price is under heavy pressure and the only thing new I am aware of is the law suit. The other risks such as uncertainty of new products launch and execution risk are not new. They have always been there for everyone to see.

It is just puzzling.

Regards.
-M

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M,
I think that even though Call is the low price provider Voice is not something that anyone is going to have a moat on. I like the way the company is doing Voice Over IP, because they can have one or two switches in one place taking care of all the voice calls. This also keeps their cost down because they do not have as much equipment nor personnel. What I don’t like about it is their Revenue has been coming down, anyone including can do Voip. The local telephone companies are getting into Voip and I think its going to become a loss leader for them so that they can bundle it for free with other offerings. People use cell phones and texting more than Land Line.

I think that they might still have a future with people that live in the USA and relatives in another country so that could help them. Also if they can start growing their Revenue’s that should help them and recently I have seen some of their ads on tv.

Andy
No position in call.

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But clearly the street disagrees. The share price is under heavy pressure and the only thing new I am aware of is the law suit. The other risks such as uncertainty of new products launch and execution risk are not new. They have always been there for everyone to see.

Hi M,
I’ll respond but hope Saul can give you more meat.

I look at small cap stocks, such as CALL, as the little kid in the schoolyard (I was one once). Every bully that wants a riskless person to pick on gets in line to take their shot.

So all the pressure down is pressure; some of it is justified given the company is in the midst of a turnaround; some of it is not justified.

Since I can’t get more intimate info, all I can go by is the following:

  1. User experience is improving rapidly under new management. That’s empirical evidence from a very reliable source of mine.
  2. The new management team is excellent, proven and has done this before and ended up in a big success.
  3. They are launching a new device, greatly improved, simultaneously with a well coordinated marketing plan.
  4. They are accumulating new APP subscribers at an over 20% rate (I think per month) with NO advertising whatsoever. The new app subscribers will be monetized very shortly but during this ramp up for subscribers, it’s free. viz., they need time on this portion to show progress.
  5. I think the old owner was a nut so they have come a far far way from those beginnings and they haven’t hit the main part of their plan yet.
  6. They have slightly slowed down the rate of churn on the old device but need to do more, which is one of the focuses (foci?) of the marketing plan.
  7. They have an activist owner Whitney Tilson who has dumped a lot of money on them and is still cheerleading.
  8. They are financially strong with no debt and some $60MM in the bank (don’t take my numbers literally…it’s a lot of loot but check it yourself).
  9. They have strong cash flow
  10. Their VOIP product compares very favorably with the competition but it’s a hard sales message to get across (my biggest worry since a bad effort will NOT slow the churn down significantly enough).
  11. They are greatly increasing their distribution.

Having said all that, it doesn’t mean they will be successful but you place your bets and you take your chances. I’m in until some of the “what we intend to do” becomes moot or has failed.

N’est ce pas?
mykie

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I’ll respond but hope Saul can give you more meat.

Mykie, Great job. The only point you left out on CALL is that their trailing PE is about five and a half. Granted their earnings have been decreasing while they get ready for this big push, but if they fell in half, they’d still have a PE of 11.

Saul

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I think that it is important on a stock like CALL to acknowledge that they have a negative public perception. It is definitely an unloved stock, the hope is the new team will overcome that both from the consumer side and the stock buyers side. Both need to happen, and sometimes it can take a while for the stock buyers to believe that changes are real and meaningful. So you could see the advertising that is happening change the consumers mind and result in sale and profits and have some delay in the stock move.

An example of this is GMCR the old management team had a drug dealer, and engaged in channel stuffing to pump revenue. It was ignored. I missed the news that management changed and they brought in a former Coke executive, got killed in CAPS where I was short the stock. At least it was only CAPS.

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I think that it is important on a stock like CALL to acknowledge that they have a negative public perception. It is definitely an unloved stock, the hope is the new team will overcome that both from the consumer side and the stock buyers side. Both need to happen, and sometimes it can take a while for the stock buyers to believe that changes are real and meaningful. So you could see the advertising that is happening change the consumers mind and result in sale and profits and have some delay in the stock move.

Exactly right FlyGal and therein lies the opportunity also. If it were loved the PE would be in the 20’s range, not 5.5. The offset is there’s little downside risk and if they pull it off, the upside has room.

Let’s hope these guys are successful.
Mykie

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