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Stock Value

Chinese Stocks

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TAKING STOCK
BY MALCOLM BERKO
RELEASE: WEDNESDAY, JANUARY 17, 2018

Chinese Stocks

Dear Mr. Berko:

In January 2015, I invested $200,000 in Chinese stocks listed on the New York Stock Exchange. The Chinese stock market was as hot as a firecracker, and people I know were making big money quickly. Needless to say, it didn’t work out for me. I bought 41 stocks, and my original $200,000 investment is now worth $127,000. Could you please look over my portfolio and tell me what to sell and what to keep? — GL, Kankakee, Ill.

Dear GL:

Most Chinese IPOs are generating unexpected losses for investors. The route has discouraged many Chinese firms from going public in the U.S. and listing their shares on the New York Stock Exchange.

Last year, 17 Chinese firms debuted on the Big Board. Accordingly, 11 of those firms are trading below their initial public offering prices, with half of them plunging within a month of their listing. For example, your Qudian (QD-$12.30) — a $1.5 billion-revenue outfit that, with its subsidiaries, runs online consumer finance platforms for the People’s Republic of China — has been a bust. QD lends small sums of cash plus merchandise credits that have retail value. QD, among China’s largest IPOs, raised $900 million when it came public at $35 a share last October. It now trades 60 percent lower. Your money’s gone.

QD and numerous other Chinese stocks are paper tigers. China uses accounting systems from the Middle Ages. Chinese concepts of return on investment, net profit margins, operating margins, shareholders’ equity, gross profits, depreciation, return on total capital, free cash flow et al. are ludicrous.

Few American companies could survive using Chinese production and management concepts, wherein most production is purchased by the government or government cooperatives, below product costs, and then retailed at lower prices to China’s citizens. Why in the name of all that is good and wonderful would one care to own stock in a Chinese company that reports its financial statements in renminbi and is guided by a menagerie of feckless Chinese securities laws that would cause the NYSE members, most members of Congress and our Securities and Exchange Commission to implode in laughter? Chinese tax laws, Chinese labor laws and Chinese bookkeeping are a farce. I want my numbers to be explained in English — not in one of the 200-plus Chinese dialects, which are Greek to me.

Chinese managers are accustomed to bribery; they expect it and they get it. Chinese companies have little care about what a product costs to make, because the government subsidizes solar panels, paint, tires, electronic games, appliances, auto production and raw materials and controls interest rates. There’s no transparency, and financial data are incomplete and often inaccurate. There are frequent reports of company suppliers being owned and controlled by current management in order to milk and maximize personal profits. And there are numerous commodity bubbles in the Chinese economy, purposefully created by the government and purposefully ignored by the government. And if just one of those bubbles were to burst, it could easily damage our global economy. Bribery is not only expected in China but also demanded; it’s a national pastime.

China Zenix Auto International (ZX-$1.42) was $5.35 a share in 2016. ReneSola (SOL-$2.60) was recently $5.20 a share. China New Borun (BORN-$1.51) traded last year at $4.70. Yingli Green Energy Holding Co. (YGE-$1.97) was $66 a few years ago. Chinese bonds are in a mad scramble, and Chinese exchange-traded funds seem to have increased their volatility. Many Chinese companies that lack integrity are being asked to leave the U.S. market.

I don’t know much about your 41 Chinese stocks, which include China Cord Blood, China Hydroelectric, Zuoan Fashion Ltd., WuXi AppTec, E-House Holdings and Nam Tai Property. They’re not covered by Morningstar, Value Line, BTIG Research, Tigress Financial Partners, Nomura Securities, GF Securities, Ping An Securities, Haitong Securities or Guosen Securities.
You are down about $73,000 from your $200,000 investment in Chinese stocks in January 2015. That’s not good!

I recommend that you take this portfolio to the China desk at Bank of America Merrill Lynch, because there’s no flaming way in paradise that I could analyze all that crap and give you a knowledgeable response.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

COPYRIGHT 2018 CREATORS.COM

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Stock Value

Making Money on Margin

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Making Money On Margin

How do you make money on margin? How does making money on margin work? Read on to find out the answers from Mr. Malcolm Berko.

Making Money on Margin

 

Dear Mr. Berko:

I got a $10,000 bonus from my employer in January and put it with a broker in early February. He has made four trades, including a biotech stock with a funny name I’ve never heard of.

My account is now worth $12,200. He said if he had my account on margin, then he could have made twice as much money. Is that true? I asked how it works, and he said I won’t have to put up more money but I just have to sign a broker’s form and I can buy twice as much stock immediately. Because he doesn’t explain things well, and I don’t want to offend him, could you please explain how margin works? And is it true that I could have made twice as much money as he claims?

Also, I’d like to buy stock in the fantastic Chinese market. Do you think Chinese stocks will move way up? What Chinese stocks would you recommend?

— LD:, Portland, Ore.

Dear LD:

That broker’s right on the money! If you had signed his margin agreement upon opening the account and followed his advice, you’d have made twice as much money. That margin agreement would give you an extra $10,000 credit so you could buy $20,000 worth of stock. The flip side of that agreement is that you could also lose twice as much.

Here’s a very simple explanation of how it works. Margin accounts, offered by most brokers, enable clients to borrow money to purchase stocks or bonds. Assume you wish to buy 100 shares of the fictional company LSMFT (LSMFT-$100), which would cost you $10,000. You can write the broker a check for $10,000 and own LSMFT free and clear. Or you can sign a margin agreement and buy 100 shares of LSMFT for $10,000, putting down 50 percent of the price ($5,000) and borrowing the remaining $5,000 from your broker. The broker charges interest (today’s rate of 8 percent is turnpike thievery because the collateral is good as gold) on the borrowed $5,000 and he holds your 100 shares of LSMFT for collateral. If the brokerage charges 8 percent simple interest, then $33.33 will be deducted from your account each month. And if 10 months later you sell LSMFT at $110, you’ll have a credit in your account of $11,000, from which you repay the broker the borrowed $5,000. Now you have $6,000 remaining and a gross profit of ($6,000 less $5,000) $1,000. So, after subtracting buying and selling commissions of $150 and 10 months of interest of $33.33 from the $1,000 gross profit you have a net profit of $516.67.

The important thing investors must understand about margin is that it’s a double-edged sword. If you had invested $10,000 in cash, your 10-month return would’ve been 5.16 percent. But you leveraged LSMFT with just $5,000 so your 10-month return is 10.32 percent. When stocks rise in value, your gains are amplified and that’s wonderful. However, in a down market, margin really hurts because the borrowed money exposes you to higher risks. Now, if you can get this in your head, you’ll have it in a nutshell.

The extreme use of leverage is one of the reasons banks like Lehman, Bear Stearns, Merrill, JPMorgan, etc., collectively lost hundreds of billions of dollars nine years ago. Goldman, Citigroup, Bank of America, etc., traded bonds using 1 percent margin, investing only $1,000 for every $100,000 of market value. If the bonds fall 5 percent or $5,000 (many did and more), the $1,000 is wiped out and they’re $4,000 on the wrong side of the eight ball. Multiply this number by billions (remember those subprime mortgages) and you may understand how the great financial crisis occurred.

Individual Chinese stocks scare the bejabbers out of me. I don’t trust China’s banking/financial system or its corporate and government executives. Corporate income statements are bloated, balance sheets are fudged, and I can’t read Pinyin so Chinese corporate reports are Greek to me. But the China market can be hot and I’d own the iShares MSCI China ETF (MCHI-$69) — that’s a Chinese imitation of the S&P 500 Index. MCHI was plus 12.5 percent last year.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2018 CREATORS.COM

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Stock Value

New Look At Newell Brands

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Newell Brands

Coca-Cola, Dymo, Elmer’s, Contigo, Rubbermaid, Coleman, Oster, Sharpie, Papermate, Sunbeam are just some of the brands which comprise Newell Brands. Newell products are in almost every consumer’s home, office, factory floor, restaurant, supermarket, school and in numerous other venues. Does this mean that Newell brands stock is a good buy? Read on to find out from Mr. Berko.

New Look at Newell

Dear Mr. Berko:

What happened to Newell? I bought 500 shares at $43 in September of 2017. My broker tells me to sell the stock and take a loss and wants me to put the proceeds in American Funds New Perspective. Your advice would be appreciated.

— JM, Moline, Ill.

Dear JM:

New Perspective (ANWPX) is a good fund with a good record and a sweet commission would be paid to your broker.

New Look At Newell Brands

It’s important to know that Newell Brands (NWL-$27) is a $14.7 billion company, and global marketer of consumer and commercial products in more than 200 countries. And most of its brands have high recognition value like Coca-Cola, Microsoft and Kleenex. So, it’s important to know NWL sells Paper Mate, Sharpie, Dymo, Parker, Elmer’s, Coleman, Jostens, Rawlings, Irwin, Lenox, Oster, First Alert, Sunbeam, Mr. Coffee, Rubbermaid Brands, Graco, Baby Jogger, Food Saver, Yankee Candle, Crock-Pot, etc. And, there’s a NWL product in almost every consumer’s home, office, factory floor, restaurant, supermarket, school and innumerous other venues.

Since June of 2017, NWL shares slumped nearly 50 percent from $55 to the current $27 price. NWL’s $15 billion acquisition of Jarden doubled 2016 revenues and earnings grew by 30 percent to $1.25 a share. And in 2017, revenues continued to improve by nearly 12 percent and earnings are expected to come in at an attractive $2.75 a share. These good numbers are the result of an impressive doubling of net profit margins, an improving e-commerce business, brand-enhancing investments, strong distribution networks and employee/management efficiencies.

In 2017, management really hunkered down and NWL benefited handsomely from the Jarden merger (synergies were more positive than management had hoped) and significant cost reductions in raw materials, manufacturing and shipping were reflected in the numbers. However, in the third quarter of 2017, NWL’s revenues slipped nearly 8 percent due to weaker-than-expected back-to-school sales, a difficult consumer market, weather conditions such as a devastating hurricane season and a shift in its hugely diversified portfolio. Resultantly, 2017 earnings of $3.00 a share and revenues of $15 billion were much lower than the Street’s estimate. Numbers for 2017 were dramatically better than all previous years, and still NWL shares plunged from $55 to a low of $25 in late January of 2018.

So, along came the spoilers (like tort lawyers trolling for business). And activist investors in the name of Starboard Value LP are aligning themselves with three former executives of Jarden who are critical of how NWL is running its sprawling menagerie of products. They believe they can do a much better job. Hah! So, now we have a proxy fight as the three former Jarden executives plus Starboard Value (together they own 5 percent of NWL shares) have delivered a letter to NWL’s CEO confirming that they have nominated a full slate of director candidates. And in an immediate response, NWL’s management announced that it was planning to offload brands that failed to meet revenue and profit objectives while closing half its factories to further improve net profit margins. NWL management intends to focus on its core consumer divisions and offloading most everything else won’t add to NWL’s already impressive net profit margins (they may reach 19 percent in three years). And current management believes earnings could come between $4.60 and $4.75 by 2021. Considering those numbers, NWL must be an attractive buy.

I think that the Starboard and Jarden people are wrongheaded and may be defeated. Current management has done a yeoman’s job running NWL, and I don’t see any need for a new board or a change in the executive suite. NWL’s management has produced some excellent numbers and I’d be proud to buy another 500 shares at the current bargain price of $27 to $28. So, considering NWL’s $1 billion share buyback program, a current 88-cent dividend yielding 3.2 percent and a current share price allowing you to own the stock at less than its $30 book value, NWL is a solid buy with a price objective of $65-$70 in the coming three years.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2018 CREATORS.COM

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Franchises

What Is The State of MasterCard and Consumer Debt During Trump Era

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MasterCard Donald Trump Consumer Debts

Previously known as Interbank Card Association, MasterCard is a group of banks. With Trump’s economic policies and infrastructure spending, how will MasterCard’s stock value fare? Read on to find out from Mr. Malcolm Berko.

MasterCard and Consumer Debt

Dear Mr. Berko:

My brother, who does well in the stock market, told me to buy 100 shares of MasterCard.

He thinks that President Donald Trump’s economic policies and infrastructure spending will grow corporate earnings and give more people jobs and many people higher-paying jobs. He says that these people will spend their money rather than save it. We both believe that the American consumer is born to spend. Please advise. — JA, Indianapolis

Dear JA:

I think your brother is right as light!

Way back in 1966, before marijuana became legal in the Western states, a group of banks formed the InterBank Card Association. And in 1968, when the movie “Planet of the Apes” was released, this association changed its name to MasterCard. In 2006, Goldman Sachs, Citigroup and HSBC took MasterCard (MA-$178) public at $39 a share. And in December 2014, just before Russia annexed Crimea, MA had a 10-for-1 split.

Back in 2007, a stockbroker with whom I occasionally exchange ideas told me to buy MA, which was trading at $46 a share. I wasn’t comfortable with his analysis. I was convinced that consumers had maxed out their personal debt (credit cards, small-loan companies, cars, student loans), because in 2007, they owed a record $10.6 trillion. And that year, the gross domestic product was $14.4 trillion. Those were staggering numbers, and I couldn’t imagine that consumer debt would stagger higher. Well, it did stagger higher. Ten years later, consumer debt had risen to $13.8 trillion, a $3.2 trillion increase, while the GDP had risen to $19 trillion, an increase of $4.6 trillion. I figured that the fit had to hit the shan sooner or later. That 30 percent increase in consumer debt between 2007 and 2017, without an equal increase in consumer income, gave me agita.

I should have bought the darn stock! During the past 10 years, MA’s revenues have grown by 350 percent. Cash flow has increased by 550 percent. Share earnings have boomed by 625 percent. And the dividend, though it’s still cheeseparing, has grown from a nickel to a dollar a share. MA is a global leader in electronic payments and has become the processor, franchisor and adviser to over 25,000 financial institutions in support of their credit, debit and other payment plans. Today MA licenses or franchises its credit card brands (MasterCard, Maestro, Cirrus) to customers all over the planet, with the exception of North Korea. I’m told that Visa (V-$124.71) has a better chance of success in North Korea than MA.

This year, with the help of 12,000 mostly happy employees, MasterCard expects to increase revenues from $12.2 billion to $13.9 billion. That certainly ain’t chopped liver. And with impressive net profit margins of 38.1 percent, management expects to report earnings in 2018 of $5.08 a share (up from $4.45 in 2017), with an increase in its miserly dividend to $1.10.

Too many American consumers are drunk on debt. And as long as they can make monthly payments, it appears that American consumers are still willing to take on more debt. Americans would own kangaroos as pets if they could be bought for $100 down and $50 a month. As employment continues to improve, as the economy continues to pick up steam, as corporate billions come in from overseas, as corporate America continues to improve earnings and grow dividends and as Trump’s economic initiatives gain traction, consumers’ borrowing appetite will push MA’s revenues, earnings and dividends nicely higher during the coming four years. By 2021, MA’s revenues could improve by 40 percent, to $18.5 billion. Earnings could improve by 43 percent, to $7.10 a share. And the dividend could run up 25 percent, to $1.27. And best of all, MA’s net profit margins will probably improve to 40 percent.

However, since December 2015 — when MA was trading in only the mid-$80s — insiders, officers and directors have been selling the stock as the shares have been running up. I wonder why, because Credit Suisse, Argus Research, Market Edge, Zacks, KeyBank, Piper Jaffray, Morgan Stanley and others have “buy” rankings on MA.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2018 CREATORS.COM

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