The Simple Reason Why I Don’t Like Facebook Stock

Well. That was a good clever start to an article if I’ve ever seen one.

Oh.

Turns out I already made the same joke. I even made the same joke about how witty I was in making the joke. It’s all very meta.

Last week I re-joined Facebook, after being off the site for approximately the last five years. Why? It’s not something I’m going to admit very freely, but it’s because I may be feeling a little homesick. Nobody ever talks about that with their WHOO! TRAVELING IS SO GREAT posts, but apparently it’s a thing.

I can’t get real nachos here either. I can get some half-assed attempt, but not the real thing. I ate nachos like once a month at home. They’re tasty, but they’re not exactly my go-to food, y’know?

So I’m back on the Facebook. (Like Financial Uproar’s page here! If you do, a puppy licks a kitten. It’s very cute.) I couldn’t retrieve my old account, because maybe I deleted it for good. At least, I think. I can’t remember.

I’m hoping it’s stuck in the bottom of some server somewhere, like a particularly sticky turd. It just won’t go down!

I did all the usual stuff you’d do when rejoining. I found about a hundred people I know and added them. I found my ex-girlfriend and made sure her new guy is less attractive than me. But I didn’t add her, because that would be the worst. People would literally die.

As I’ve gone through and added people, I noticed something.

Nobody ever posts anymore. Not only that, but it took a lot of people a day or so to get to my friend request. Not only have people stopped showing up as much, but they don’t put nearly as much stuff on there. Somebody who used to be on several times a day now might only be on once a day.

I noticed something else, as I added all my old high school classmates and people I used to work with. A lot of people weren’t there anymore. Like me, they just up and deleted their profiles.

In the second quarter of 2012, Facebook reported that 130 million people in the U.S. and Canada showed up at least once a day. Two years later it was up to 152 million. That’s about an 8% increase per year. That’s not very exciting.

Of course, the rest of the world is where the exciting growth is. European daily users rose about a third, going from 152 million to 203 million. Asia basically doubled, from 129 million to 228 million. And the rest of the world did well too, going from 139 million to 244 million. Overall, the number of daily users rose from 552 million to 829 million.

That ain’t bad. But what about monthly active users?

Overall they grew from 955 million to 1.32 billion. In North America, they grew from 186 million to 204 million. Even though North America grew, it wasn’t really that impressive. Monthly active users barely rose 5% a year over the last two. This isn’t very exciting for a stock that’s trading at more than 82 times earnings.

Of course, all the growth is coming from Europe, Asia, and the rest of the planet. Who cares about North America?

It’s important for one reason — it’s Facebook’s only mature market.

The company started in 2004, and opened the site up to everyone in 2006. I created my original profile in 2007, when it was very popular. Then a few years later the site hit another milestone as it introduced mobile browsing for the first time.

Now? It’s kinda boring. Nobody is excited to go on Facebook anymore. They show up, scroll through their timeline, like a few things, and then hit the road. North Americans are bored with it. We have Facebook because we perceive a need, not because anybody is excited about it. Asians are excited about Facebook. Canadians are not. It’s become a utility.

Meaning, in about three years growth is going to come to a screeching halt. It’s already starting to happen in North America. The company will have signed up everyone on the planet who wants a profile, and there will be very little growth left. Even if it manages to get unbanned in China, do you really think the Chinese are going to rush and replace existing social networks with Facebook? I doubt it.

Which is why you’d be nuts to even look at the stock at these levels. Besides, you can’t convince me we have anything less than a massive social media bubble going on right now. Just look at the valuations. When Facebook stops adding 50 million users a quarter, that stock has a long way to fall. It’s barely profitable, and that’s after spending the last three years doing nothing but working on making it profitable.

Let’s put it this way. In 2013, Ford’s net profit was $7.1 billion. Facebook made $1.5 billion. Ford has a market cap of $66 billion, while Facebook has a market cap of $196 billion. What would you rather own — THREE Fords earning you north of $21 billion per year, or Facebook, earning you $1.5 billion per year but with lots of growth?

Facebook will peak at some point. Don’t be holding it when it does.

 

I’m Wrestling With This Investment

I’m Wrestling With This Investment

Oh boy! Not only is the title more clever than that time I came up with Linky and the Brain for a Saturday Morning Dump back in the day, but I’m going to take a look at investing in World Wrestling Entertainment (NYSE: WWE). If you’re anything like me, you’d be hilarious and handsome. You also would have spent altogether too much time in your youth smelling what The Rock was cooking.

That’s a wrestling reference. You should expect a lot more of those.

Here’s a one-year chart. As you can see, it’s more beaten up than The Undertaker at this year’s Westlemania.

Screen Shot 2014-05-27 at 10.52.03 PM

 

Wrestling peaked in popularity in the late 1990s, right around the same time WWE’s shares went public. That’s some good timing by Vince McMahon, the CEO and majority owner. He also used to be a big part of the act, at least back in the day. I’m not sure how involved he gets these days.

Anyway, the company makes money in a few different ways. It sells pay per view events, which it hypes relentlessly during its weekly programs. It also sells a mountain of merchandise, both online and when fans go to the live events. Tickets are sold to those live events as well, obviously. And finally, it has an exclusive contract to show its weekly shows – Monday Night Raw and Friday Night Smackdown – on network TV in many countries around the world.

The company had a really interesting idea. It would sell, for $10 a month, an exclusive television network to its fans, like a Netflix of wresting. Fans would get access to all the company’s monthly pay per view events, lots of old footage, pre and post game shows for all its big events, and weekly shows like Raw and Smackdown.

For a hardcore fan, getting the network seemed like a no-brainer. Pay per view events cost $45 a pop, with Wrestlemania coming in at $60. Most fans either just splurge for Wrestlemania – by far the biggest event of the company’s calendar – or get a bunch of people together to split the cost of regular pay per views.

We all know a football or hockey fan that splurge to get access to every game, so why wouldn’t WWE fans do the same thing? The company announced it would launch the network at around the same time as Wrestlemania, and McMahon came out and figured the company could sell 2 million subscriptions. Anything over a million and the company would make money.

They sold 660,000.

That’s when the stock originally fell. And then, shortly after, more bad news. The company’s television contract came up for renewal in the U.S., its biggest market. WWE has interesting demographics. Women enjoy the product much more than they enjoy traditional sports. Its weekly shows regularly are more popular than the NHL and NASCAR, and regularly do comparable numbers to the NBA, America’s second favorite sport. You’d think the company could sign a nice sized contract.

It did end up resigning a new five-year deal with NBC Universal, continuing to show Raw on USA Network and Smackdown on Syfy, because if there’s a station I’d put wresting on, it’s the science fiction channel. Okay, I guess wrestling is a form of science fiction. Anyway, no financial terms were released, leading investors to assume the contract was a disappointment. Speculation is that NBC balked at signing a higher priced contract because it assumed viewers would watch Raw and Smackdown on WWE’s specialty network.

These two huge pieces of bad news sent the stock down further than an Owen Hart plunge from the rafters.

WWE made a paltry $0.04 in 2013, mostly thanks to higher operating costs. It paid out 48 cents per share in dividends. That probably makes wrestling actually safer than its dividend. It is sitting on almost $1.50 per share in cash on its balance sheet, but if it continues to lose money from its network that cash will go away quickly.

Okay, enough bad news. There are a couple of reasons why I think the company could recover.

First of all, when WWE announced network numbers, the network had been around for all of about two months. It hasn’t even tried to expand the concept internationally either. It is having problems with people who don’t have the proper technology needed to watch the network’s programming on their TVs, but this isn’t insurmountable. The company has admitted the network hasn’t grown as fast as it previously assumed, but it’s still way too early to give up on it.

Since WWE owns all its old content, the network has the opportunity to eventually become ridiculously profitable. Not only would it be a giant commercial for the company’s products, it would also smooth out revenue that traditionally spikes with Wrestlemania. Getting $10 a month is far better than just getting $60 for Wrestlemania.

As for the TV deal, I want to wait until the company releases actual numbers. It could be that the first couple years of the deal are weak, and then it gets better in 2016 or 2017. It still has to sign a deal in India as well, which could end up being decent.

I haven’t bought the stock yet, but it has earned a place on my watch list. The WWE brand is certainly worth something, and I think the network has potential. It’s a cheaper than it’s been for years. In conclusion, crappy wrestling joke.

On Negative Enterprise Value Stocks

On Negative Enterprise Value Stocks

A few months ago, I embarked on a project I called The Financial Uproar Less Than Cash Index (or NAMBLA for short). I’d run a screen which identified stocks trading for less than the cash on their balance sheet, blindly buy all the stocks that fit the criteria, and then take all the gains to the imaginary bank. Because I’d be nuts if I’d risk actual cash on this hair brained scheme. Wil-E-Coyote strapping rockets to his roller skates was a smarter idea.

And in my haste to make a point, I realize that my screen had one major flaw. I hadn’t properly controlled for each company’s liabilities. If a stock trades at $1 per share, has $1.50 in cash and has 56 cents of liabilities (debt, underfunded pensions, deferred taxes, etc.) then it doesn’t really trade for less than the cash on its balance sheet. What I really needed to do was take 20 minutes per name and make sure the balance sheet was actually clean.

I might take the time to do that one day, but in the meantime I stumbled upon something that I found on the Twitter. I can’t remember who posted it originally but if you’re the person, feel free to claim credit in the comments. It’s about the returns investors would get by investing in companies with negative enterprise values.

The piece – by a guy named Alon Bockman, who looks like he’d be a blast to have at a party – breaks down returns that investors would have enjoyed by blindly buying negative enterprise value stocks by each country, and looks at results over 40 years between 1972 and 2012.

Before I get into it, let me further explain what a negative enterprise value stock is. You take a company’s cash position and subtract all debt. If that net cash level is still more than the share price, you’ve got a stock trading at a negative enterprise value. There won’t be very many of these when the market is high (like now) and there will be more once the market goes down.

Okay, enough stalling. How did negative enterprise value stocks perform? Really well, actually.

Bockman’s first set of results come from the United States. There were more than 26,000 total opportunities to buy negative enterprise value stocks. The model assumed you bought and then held on for a year, and then sold. If the stock languished in negative enterprise value land for six months, it assumed you bought and sold six times. The result was an average return of each opportunity of more than 50%.

Here’s his chart.

Screen Shot 2014-04-02 at 9.02.39 PM

 

A couple of takeaways:

1. Notice how the vast majority of the opportunities came in the micro cap space? That’s not by coincidence. Companies with less than a $50 million market cap are too small to be noticed by any institutional investors.

2. And total return was much higher for micro caps. Because when small stocks get beaten up, they get really beaten up. I continue to stress you all should be buying small cap stocks. There’s no way you can consistently beat the market buying large caps. None. Do you really expect you know more about Apple than Goldman Sachs does? Don’t delude yourself.

Bockman goes one step further, and looks at negative enterprise value stocks over a number of different countries, over the same time period. The results are a little surprising.

Screen Shot 2014-04-02 at 9.10.51 PMWHOO CANADA BEATS AMERICA AGAIN TAKE THAT MURICA.

It’s interesting how certain countries which would be identified as less stringent on the regulations (Israel, Cayman Islands, Hong Kong) do better than Canada or the U.S. No surprise China is so low, considering all the reverse takeover frauds that plagued the country during the last few years. Not exactly sure why the Netherlands did so poorly, but it seems like a good excuse to blame a stoned guy riding a bike, so let’s do that.

You could try to replicate these results. I don’t even think it would be that hard. But you’d be investing in some stuff that looked like absolute trash on the surface. Instead, I’d just take this as confirmation that companies with lots of cash on their balance sheets are good, and if you can find some that have lots of cash and a reasonable underlying business, they should be purchased. With markets as high as they are, those stocks are getting tougher to find.

 

Want To Invest In Payday Loans?

Because I spend hours and hours scouring the internet instead of doing anything productive, I’ve discovered a Canadian way to invest in payday loans. And no, I’m not talking about lending your buddy $50 for smokes and booze until next week. Besides, he’s not going to pay you back. You suck.

I know, I know. We all think payday loans are bad, and dumb, and worse than a Suze Orman endorsed prepaid credit card. And obviously, I’m not encouraging anybody reading this to go out and borrow money from one of these companies. They are the financial equivalent of heroin.

(Related: How to invest in weed)

But, saying that, I think people who smoke cigarettes and overindulge in alcohol are a special kind of stupid too. Both of those things are detrimental to your long term health, and really shouldn’t be done by anyone. Just because I think something is dumb doesn’t necessarily mean I don’t support your right to do stupid things, especially when those stupid things hurt only yourself.

So with that being said, I would have no problem plunking down some cash to invest in payday loans. Let’s see how.

In Canada, there is one publicly traded payday loan company, Cash Store Financial. The company was founded approximately a decade ago, out of Edmonton, and has quickly grown to over 500 locations across Canada, under the Cash Store and Instaloans labels. Close to 200 of these locations are in Ontario, which will become important in a minute. They also have a UK division, which is up to 25 stores.

The stock has struggled lately, as a bunch of factors have caused it to fall. The company was acting as an intermediary between customers and a Canadian bank, (DC Bank, to be precise) letting the bank take the credit risk. The bank was charging for this, obviously, and the company thought they could do a better job themselves. So they took a charge, severed the contract, and then borrowed a bunch of money to eventually be lent to dirtbags. This increased The Cash Store’s financial risk, which the market didn’t like.

And then, the company announced their dividend would be eliminated, at least for the time being, but in an odd way. Instead of releasing a statement, management just mentioned it on the conference call. Google Finance still thinks they pay a dividend. They do not. They’re also closing non-performing stores, and year over year revenue isn’t increasing.

And then, the big whammy. The Province of Ontario announced they were issuing a proposal to shut down the company’s operations in Ontario. The reason? In Ontario, the company can only charge a maximum of 21% for a loan, which includes interest and all fees. So the company does. What’s the problem?

Even though it’s called The Cash Store, the company’s business model involves zero actual cash. Everything is done electronically. If you get a payday loan with them, they put that money in your bank account. When it’s time to pay up, they take that money from the borrower’s account, just like any regular bill payment. This is all fine and good, except sometimes the money isn’t there. (remember who we’re dealing with here) So they charge the borrower an NSF fee, which pushes the cost of the loan above the legal limit.

The company has responded to the province. They plan to fight, and so on. They’ve also responded by no longer offering payday loans in Ontario. They offer lines of credit now, which are totally different than payday loans. How? Instead of having to pay it back by your payday, you now get two paydays to pay it back. It’s the payday loan version of putting two googly eyes on your cat’s ass and calling it a whole new animal.

The company is fighting the province’s desire to kick them out, but I’m not sure they’re going to win. Offering a line of credit that’s barely different than a traditional payday loan isn’t going to please the regulators.

Let’s look at the worst case scenario, which is the company getting kicked out of Ontario. They currently have 511 stores open, around 180 are in Canada’s biggest province, or 35%. Revenues would fall from $187M to $121.5M. The company lost money last year, approximately $3M once you take away the $40M charge they took when they severed their relationship with DC Bank. They’ve had several bad quarters in a row, they haven’t posted a profitable quarter in nearly a year.

The balance sheet isn’t great either, thanks to the $130M the company borrowed. They also have a lot of goodwill and intangible assets on the books, something no value investor likes to see. There’s very little in real assets the company can sell if things start to go badly.

Anyway, I’m getting bored. You anti-payday-loan people will be happy. Buying shares in The Cash Store is not a good way to invest in a title loan company. Although these people should probably know that I’d have no problem buying shares if the company’s fundamentals weren’t so bad.