Perspective and Price Anchoring

Investment Analysis Clubs Saul’s Investing Discussions
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I glanced at several posts today discussing todays little pullback specifically using words like “discount” or “on sale” or “missed the lower prices”.

I do find these to be interesting choice of words especially since they likely demonstrate some element of price anchoring…usually to previous highs rather than previous lows. Bull markets of course never relentlessly go up and we have had an amazing year in 2017.

But there can be danger in price anchoring and defining a stock’s value based on its previous high and then grabbing every chance to buy more with every dip (or as they said in 2000, “catching a falling knife”).

Look at a few of the stocks followed here at Saul’s board regarding their returns YTD in 2017 AFTER this “discount”:

SHOP - up over 100% YTD
ANET - up over 100% YTD
Sq - up over 150% YTD
LGIH - up over 100% YTD
HUBS - up over 50% YTD
TLND - up over 70% YTD
NVDA - up over 80% YTD
NTNX - up over 25% YTD
WIX - up over 10% YTD
UBNT - up over 15% YTD

Now ask yourself with stocks up by these amounts YTD…when these stocks drop by 6-7% on a day like today but are STILL up by these amounts…how does that become a “discount”, “on sale” or a major buying opportunity???

IMO, one cannot use such value based attributes to stocks that have mostly had moon shots this year…some sitting at or near historically high P/S ratios (SHOP).

Sometimes, the best action is no action or even trimming, in case truly discounted stocks present themselves…but I really don’t see how the above vernacular fits into a little drop compared to the gains already logged in this year.

We heard the same lingo in 2000 and again in 2008…when many bought too early thinking their highs would soon return…just say’n…“value” should have no price anchor.

Best:
Duma

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As Duma articulately indicates, anchoring on price is a mistake we all make. A “bargain” etc. is not such just because the price is now down 10%. A company like SHOP is difficult to ascertain what is a proper valuation. I have expressed my fundamental concern often enough, which makes me wary at this valuation. However many others disagree with my concern (not dismissing the assessment, but dismissing how material my concern is) and if those that disagree are correct, then SHOP may be undervalued at this point in time, whether it is 10% lower today, or 10% higher tomorrow, really will not make a difference except for trading in and out (and that is perfectly fine. Many people make money doing that. I have made tons of money doing so in the past, but with swings much greater than 10%).

I am just here to express my fundamental analysis of ANET. At the ending valuation, the enterprise value to earnings on expected 2018 earnings (mine of $8 a share) is now 23x. One year from now, if ANET does indeed earnings $8 a share (plus it will have printed more cash, thus making the enterprise value even lower than it currently is, thus this number will even be lower) ANET will have a trailing Enterprise value to earnings of 23x.

Just 30 days ago the high estimate for ANET was either $6.15 or $6.50 a share. The average estimate was in the $5 range (increased from the $3 to $4 range) for 2018.

Now the high value is in the $7 and something range, and the average estimate is in the $6 range.

All of these continually rising earnings estimates I believe are conservative and I am sticking with $8 a share in earnings for 2018.

I have discussed many times how 100gb is the launching point for ANET when ANET’s competitive advantage increases materially vs. the competition and they will start to accelerate their market share gains. This, combined with the disruptive routing product that has really started to take off this past quarter, and ANET is again on its way.

It should also be noted that ANET is finally seeing results from the HP partnership to sell into the largely untapped enterprise market (untapped for them), and into the very large service provider market that ANET has previously under penetrated.

As such, I do thin that although ANET appears to be expensive, when you look closer you may want to make a different assessment. My opinion.

Tinker

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Duma,

The choice of words that you didn’t like were just words . Not meant to address the subject of price anchoring . Just a way to connect with fellow investors . Sharing that we added shares to this or that stock on a red ink day . Certainly not meant to offend superior investors like you.

I was invested in 2000 and in 2008 and in 2011 . I know what the big drops are like . So what .
I’ve seen much worse things in life than that, as have many of us.

You have heard the same “lingo” in 2000 and 2008 . Gosh that must have been so hard for you.

You make sour grapes out of nothing . Get a life .

Frank

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As such, I do thin that although ANET appears to be expensive, when you look closer you may want to make a different assessment. My opinion.

Tinker,

A friend of mine was a Cadillac salesman back in the 70’s. When the 80’s came along he had made his money. He sold his dealerships and bought a farm outside of DC in Northern Virginia. Being a newly minted rich guy, he thought he needed horses.

So he bought some horses. He went down to the feed store to buy some oats. It wasn’t long and he figured out that feeding horses was expensive. So he said to the owner of the feed store, “These oats are expensive. Can I get something that is not so expensive?” The feed store owner thought a minute and replied,“Well, these are expensive, but they are nice clean oats and the they smell good and keep the horses healthy. However, I can get you something cheaper. Out back we have some used oats if you like.”

Cheers
Qazulight

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re GAAP, use it if you like, or not, not worth arguing over. Me I ignore it but I invest in a limited type of stock.
.
ears and coffee could have used more polite language.
But losing money does make you testy. No matter how often has happened before it’s no fun. The second or third time I hit my finger with a hammer or other tool it was not better than the first time just because I had experience.

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Frank,there’s no need to be rude and childish, maybe switch to decaf,you’re sounding edgy.

Lucky Dog

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Frank,there’s no need to be rude and childish, maybe switch to decaf,you’re sounding edgy.

Beware! An itsy bitsy teenie weenie correction and tempers are already fraying…

Denny Schlesinger

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Yes price anchoring. But when you point out how much they rose since the beginning of the year and say ‘what is a 6% drop compare to a 150% gain YTD?’ aren’t you also anchoring to the Jan 1 price? Isn’t that anchoring to a different (lower) price?

tj

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I’m not sure price anchoring is what I would call the scenarios Duma is identifying with, but the concern is valid. History demonstrates the market goes through waves of extreme valuations as in the late 60’s, 90’s, 2008, etc. and then they revert back to the mean, sometimes very rapidly (read “What works on Wall Street” by O’Shaughnessy).

In my observations, extreme valuations are usually accompanied by extreme growth estimates, and many times without regard for value. When valuation metrics like P/S, P/B, P/FCF get way out of whack risk grows in proportion. This was especially evident in the late 90’s going into 2000 when anything Internet was bid up to the moon despite non-existent sales and cashflows. The next 2 years took it all back. It’s what we can expect.

When I play with companies like these I tend to use options strategies to capture upside, but limit downside. For example, rather than buying the shares, I often use vertical spreads or even just buy calls where my exposure is limited to the premium I paid for the calls. Once I have a decent profit cushion I then use that profit as my capital to do it again and again. In this upward biased market I am leaving some profit on the table, for sure, but my risk profile is very limited.

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Invest wisely my friends

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Once I have a decent profit cushion I then use that profit as my capital to do it again and again.

Solo,

Would you please describe or give an example how you do this?

Chris

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Hi Chris, I gave a high level idea of this strategy in the post. The call spread strategy is pretty simple, I personally used this on AMZN, ANET, COHR, etc. several times. I usually look for a spread with close to 100% return, which typically implies selling one call at a strike above current price, and buying one call near current price or just slightly less. Most times the payback at full return is double what I pay for the spread, but sometimes a few pennies less. In this strategy if the price appreciates above the short call strike you can use your long call to cover. If the price falls below your long call then you can let it expire and you will only lose the premium you paid for the spread and not a penny more.

This strategy also works with put spreads if you prefer to get a credit instead of paying a debit. The put spread entails selling a put at one strike, and buying a put at a lower strike, and again I try to get close to 100% return. The short put is covered by the long put, so the worst that can happen is you lose the premium credit x 2.

My Actual Examples:
06/29/2017 STO 09-15-2017 AMZN $985 CALL, BTO AMZN $965 CALL - for debit of $990 per contract.
I closed this spread on 09/13 for over $17, but had I waited another 2 days I would have been able to close it for near $20.

09/29/2017 STO 11-17-2017 AMZN $965 PUT, BTO AMZN $955 PUT - for credit of $475 per contract
This one expired worthless, so I kept the $475 credit.

On just these two trades I made $1200 (times the number of contracts). That is $1200 in seed money to play with on the next option opportunity.

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Invest wisely my friends

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While we’re at it, here is another trade that fits into this strategy; with AMZN last traded at $1402.05, you can setup this spread:

STO 02-16-2018 $1400 PUT, BTO $1390 PUT, for a credit of $497 (natural B/A split).

With this trade you would be putting $503 of your money at risk, with a profit potential of $497 in just 19 days.

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Invest wisely my friends
CMFSoloFool - Ticker Guide / Share Holder
Profile and holdings: https://goo.gl/TYTU4S

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