Passive Income

Become a Private Equity Investor for Passive Income

Posted on February 8, 2018March 16, 2018 by Team Editor

crowdfunding

Private equity is one of the best performing asset classes over time, but, at least until now, individual investors have largely been locked out of the market.

Private equity or PE is an asset class allowing investors to directly invest in private companies. Sometimes PE firms will buy a whole company and at other times they take a smaller equity investment.

The industry is tightly regulated and is limited to large pension funds and endowments, as well as individual wealthy investors. Individuals have needed to be accredited, meaning they have high incomes or assets of $1 million or more. That has recently changed, as we explain below.

PE funds use investor capital to buy and add value to companies. Value can come from increasing sales and / or cutting costs. The goal is for the private-equity fund and its investors to make money when a target company is sold.

If the company fails to grow, PE investors will lose money. It’s also possible a company can go into bankruptcy and that would hurt the returns of investors. But, PE firms tend to build diversified portfolios so the losses can be kept relatively small.

But, the risks tend to be worth the rewards in this asset class. According to CBS News, Steven Kaplan, a professor at the University of Chicago Booth School of Business, told the Washington Post that “On average, each dollar invested in one has returned 27% more than that same dollar would have earned in the S&P 500 or other public-equity fund.”

top funds

Source: Forbes

Now, An Opening for Small Investors

This area opened up to individual investors who don’t have $1 million or more in 2012 with the Jumpstart Our Business Startups Act, or JOBS Act. While having many different functions, the one that has captured the most attention is the area surrounding crowdfunding.

The JOBS Act allows companies to raise an unlimited amount of funds from accredited investors. It also allows smaller companies to raise up to $1.07 million from both accredited and non accredited investors.

There are limits on the deals that smaller investors can participate in. The offers must follow a highly prescriptive set of rules. The offer must be listed on a FINRA approved funding portal or with a Broker Dealer. Investors are limited in the amount they may invest.

But, even with restrictions, this is a new asset class that every investor should consider. Before getting into the details, it’s important to remember that this investment, like all others, combines the ideas of risks and rewards. High rewards require accepting high degrees of risk, and both are available in this investment category.

A recent Forbes article summarized the performance of one crowdfunding web site:

“Does the potential for a 40 per cent plus returns over three-and-a-half years or so offer sufficient incentive for a 40 per cent failure rate? Those are the numbers that jump out of the report published today by Seedrs, one of the UK’s big three equity crowdfunding platforms, into the performance of companies that have raised money with it.”

The average returns worked out to 14.4% a year for deals on the site. But, investors in this field will pick and choose which deals they participate in. It’s unlikely they will achieve average returns unless they invest in a very large number of deals.

Since the investor will be selecting individual deals, there is another important piece of information to keep in mind from that article. That is the fact that 41% of the deals lost money. Some lost 100% of investors’ money while others suffered smaller losses.

Finding Deals

Several web sites allow small investors to participate in this opportunity. While the goal will be to create passive income, the investor may need to be patient and expect money to be tied up for some time before returns are seen.

Among the sites offering deals is CircleUp which has raised over $300 million since the site began operating in 2012.

CircleUp also has a $125 million growth fund to invest in companies directly. Using machine learning technology called Helio, CircleUp Growth Partners says it will be able to identify potential investments using data about companies to predict success.

CircleUp co-founder and COO Rory Eakin said that he believes the company will be able to “find patterns and signals” and is “pioneering the advent of data and analytics.”

While CircleUp is using technology to make its investments, the investments themselves will not be in the technology category. Instead, CircleUp is looking at categories like food and beverage, and personal care. Eakin says CircleUp’s strategy is “companies that produce something that sit on a shelf.”

The companies that they’ll be looking at have $1 million to $10 million in revenue. Eakin says that they’ll be co-investing with others in the CircleUp community.

Fundable has raised over $411 million for startup companies. LocalStake allows investors to focus on the communities they want to buy into. That could be their local community or a community an investor believes is growing and could provide diversification.

Wefunder is designed to be a platform connecting investors with startup founders. It highlights the source of “information regarding companies on Wefunder is provided by the companies themselves. Wefunder may assist a company in presenting this information, but we don’t verify its accuracy or endorse the company.”

That is an important factor to consider in the investment. There is a great deal of research required to verify information since it will be initially provided by the company.

It is important to remember that these are long term investment opportunities. LocalStake notes, “If you decide that you no longer wish to remain invested during the fundraise, you can cancel your investment for any reason up to 48 hours after the business countersigns your investment documents at no charge.”

After 48 hours, you are committed to what could be an illiquid investment that could take years to recover. Or could result in a complete loss.

While there are risks to crowdfunding small businesses, there are also potential rewards. Passive income from business startups is possible for investors who can accept the risks.

Stock Picks

Analysts Say Look at This Sector as Stocks Rebound

Posted on February 7, 2018February 19, 2018 by Team Editor

biotech

Stocks fell sharply over the past week. The S&P 500 dropped 9.5% below its all time high. The Dow Jones Industrial Average dipped 10.7% below its high and the Russell 2000 index which tracks small cap stocks declined 10.2%. These selloffs mark the first 5% decline since 2016.

Now that the pull back many investors had been waiting for is in place, it could be time to refocus on potential buying opportunities. One of the sectors that was hard hit in the sell off was the biotech sector.

The chart below shows the Nasdaq Biotech index. The index dropped 11.6% in a little more than a week as sellers seemed to panic.

Nasdaq Biotech Index

The steep decline obviously makes some stocks more reasonably valued since there were no significant changes to the fundamentals over that time. The market decline appears to have been an emotional response rather than a response to changes in the economy or earnings power of stocks.

Potential Bargains in the Sector

RBC analyst Brian Abrahams told clients that there are some “opportune entry points” for certain biotechs stocks with data and/or approvals expected in 2018. Among the stocks that analysts like in the sector are Celgene (Nasdaq: CELG), Vertex Pharmaceuticals (Nasdaq: VRTX) and Incyte (Nasdaq: INCY).

His outlook for Celgene is positive after what he noted were a “few missteps in the second half of 2017.” Among those missteps was a report that sales of the company’s psoriatic arthritis drug, Otezla, fell in the third quarter.

“We’re very disappointed with the results of the quarter and are committed to rebounding very quickly with respect to Otezla and our overall performance,” Chief Executive Mark Alles said at the time, adding the drug’s problems were “a major disappointment.”

Otezla sales of $308 million in the quarter missed analyst estimates by over $100 million. The company blamed slowing growth in both the psoriasis and psoriatic arthritis markets in the U.S. due to reimbursement challenges from insurers.

After that, Celegene lowered its full-year Otezla sales forecast to $1.25 billion, from a previous range of $1.5 billion to $1.7 billion.

Sales of that drug rebounded in the fourth quarter as sales hit $371 million, up almost 22% from the same period a year earlier. But, the stock failed to recover.

CELG

The stock now trades at about 9.2 times this year’s expected earnings per share of $10.28. Historically, the average price to earnings (P/E) ratio for biotech stocks has been about 25.

The low valuation stands in stark contrast to the company’s potentially bright future. Cancer drug Revlimid, the company’s biggest selling drug, faces generic competition starting in 2022. To offset that risk, Celgene recently announced its plan to acquire the remainder of Juno Therapeutics.

Adding Juno to its research pipeline, Celgene is now in the CAR-T business. CAR-T therapies teach the immune system to identify and fight cancer. But, there is little urgency to replacing Revlimid which enjoys at least some patent protection until 2026,.

This year, Abrahams, the RBC analyst, sees a number of potential catalysts including additional data for Revlimid in treating lymphoma and late-stage data for drug luspatercept, a blood disorders drug Celgene is partnering with Acceleron Pharma to bring to the market.

Two More Biotech Ideas

Vertex is also on the analyst’s list of potential buys.

Abrahams says Vertex was “a victim of bad timing.” Vertex recently reported strong data for its triple-combination regimens in cystic fibrosis. But the data came out just as the broader markets were beginning to turn and the stock is now down 10%.

Strong effectiveness from drugs known as VX-659 and VX-445 in two triple regimens heading into Phase 3 studies support the likelihood that Vertex can expand into a tough-to-treat population of cystic fibrosis patients, he said.

It also enables “multiple additional shots on goal and sets a bar that will be difficult to match or beat — and with significant lead time — likely rendering mid-year competitive data from Galapagos (GLPG) (an overhang on Vertex shares) much less impactful.”

He raised his price target on Vertex to $200, a potential gain of about 25%.

VRTX

Incyte is a third possible buy candidate. Incyte is set to read out data from a Phase 3 trial known as Echo-301 in the first half of 2018. The study combined Incyte’s immuno-oncology drug epacadostat with Dow stock Merck’s Keytruda in late-stage melanoma.

Both drugs belong to a class known as immuno-oncology treatments. Epacadostat works to block interactions involving the IDO enzyme in the immune system. Keytruda is called a PD-1 inhibitor, which has a similar interaction with the PD-L1 protein.

Instinet analyst Christopher Marai expects the trial will read out positively and could be similar to a regimen of Bristol-Myers Squibb’s drugs Opdivo and Yervoy. Bristol is also combining these drugs to treat other cancers, including advanced lung cancer.

If so, “epacadostat could become part of the standard of care in metastatic melanoma with broad adoption augmenting current anti-PD-1 use,” he said in a note to clients. That could lead to peak worldwide sales north of $1 billion in melanoma alone for epacadostat.

But, that could be an optimistic outlook for the drug and that view is not shared by all analysts.

RBC’s Abrahams says eventually nearly all the value for epacadostat will soon be gone from Incyte’s shares. He sees $65 per share for Jakafi, which treats a bone marrow disorder, and $8 per share for Olumiant, a rheumatoid arthritis drug co-developed with Eli Lilly.

INCY

Other factors weigh into the price target for INCY but that would be a significant decline from current levels.

Implementing a Trading Strategy

That is a reminder that there is significant risk in the biotech sector and traders should never ignore risks. However, the sector does offer the potential to deliver significant gains if the stock market trading recovers, since many of the stocks in the sector are favorites of momentum investors.

Investing in stocks is a balance between the potential risks and rewards. It could be best to build a diversified portfolio, especially in biotechs where a single report on a drug trail could move the stock significantly in moments.

Options also offer a way to trade the sector. Call options on CELG and VRTX could be paired with put options on INCY, for example. This trade would be less expensive to open, carries defined risk, and could provide gains whether the market goes up or down in the coming weeks.

Value Investing

John templeton investment strategy

Posted on February 6, 2018July 25, 2018 by Team Editor

Sir John Templeton

Source: John Templeton Foundation

When we think of investors who changed the theory of investing, we might think of Warren Buffett who took the philosophy of value investing to previously unimaginable heights. We might also think of Peter Lynch who championed the individual investor who he believed could beat Wall Street.

We should also think of Sir John Templeton investment strategy, an investor who opened the world of investment opportunities to individual investors.

Templeton is a legend on Wall Street. He began his career at what many would consider to be a difficult time to break into the business, in 1938 as the market’s recovery from the Great Crash of 1929 was in question. The Dow Jones Industrial Average fell 50% that year, leading many to wonder if the bear market would ever end.

Rather than seeing despair, as always, Templeton saw opportunity. He followed a very simple investing strategy, always believing it was best to “buy low, sell high.”

Seizing an Opportunity to Buy Low

When the Second World War broke out in Europe in 1939, Templeton built a portfolio that would become the cornerstone of his legend.

At that time, he borrowed money to buy 100 shares of stock in each of the 104 companies selling at one dollar per share or less, including 34 companies that were in bankruptcy. Only four turned out to be worthless, and he turned large profits on the others. He was believed to have earned 200% on that portfolio in just a few years.

Templeton entered the mutual fund industry in 1954, when he established the Templeton Growth Fund. With dividends reinvested, each $10,000 invested in the Templeton Growth Fund Class A at its inception would have grown to $2 million by 1992, when he sold the family of Templeton Funds to the Franklin Group. In 1999, Money magazine called him “arguably the greatest global stock picker of the century.”

Franklin Templeton Investments

It was said that Templeton took value investing “to an extreme, picking nations, industries, and companies hitting rock-bottom, what he called “points of maximum pessimism.”

His philosophy of buying low and selling high was based on his outlook that markets would move between extremes. He said that “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

A Global Outlook

Templeton earned his undergraduate degree at Yale, where he had worked to support himself and fund his education. It was there that he developed his global investment philosophy.

He once told an interviewer, “In Tennessee I didn’t meet anybody who owned a share of anything. At Yale there were hundreds of boys from wealthy families, but not a single one who was investing outside one nation. I thought that was just not sensible. Surely they’d get better results if they searched everywhere rather than limiting their search to one country.”

That idea became a multibillion dollar investment firm.

When Templeton founded his firm, international investing was beyond the reach of individual investors. Now, of course, that has changed. Individuals can use exchange traded funds, or ETFs, to invest in foreign countries.

An ETF is a basket of stocks that generally tracks an index and is available to trade just like a stock. ETFs exist for many single countries, for geographic regions of the world, and for global indexes that track sectors in individual countries or across countries.

Individual companies are also available to individual investors as ADRs.

An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange.

ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes.

A Value Philosophy

No matter where in the world he was searching for potential investments, Templeton looked for certain characteristics in the companies he invested in. He was looking for value, growth, good management, and conservative management.

Templeton's Way With Money

To find value, many investors focus on the price to earnings (P/E) ratio. This is a measure of how much an investor is paying for $1 worth of earnings. Ideally, from Templeton’s perspective, the current P/E ratio should be less than the five year average P/E ratio for the stock. This shows the company is cheap.

But, the company should also be cheap relative to its competition. To measure this, the current P/E ratio should be below the average ratio of all companies in its industry. The industry can be measured with an index of stocks in the company’s home country or a global index.

To find growth, the focus should be on earnings per share (EPS). Templeton liked seeing EPS growth for each year over at least the last five years. It is best if EPS are projected to increase in the current year.

Again, there should be comparative strength in this metric. It’s not enough to find a good company. Templeton wants the best in the world. So, in addition to absolute EPS growth, additionally, the company should have forecasted earnings growth greater than the industry average.

To find good management, Templeton looked at the operating profit margin.

Operating margin is a margin ratio used to measure a company’s pricing strategy and operating efficiency.

Operating margin is a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc. It can be calculated by dividing a company’s operating income (also known as “operating profit”) during a given period by its net sales during the same period.

“Operating income” here refers to the profit that a company retains after removing operating expenses (such as cost of goods sold and wages) and depreciation. “Net sales” here refers to the total value of sales minus the value of returned goods, allowances for damaged and missing goods, and discount sales.

The company’s operating margin should be better than its industry average and showing steady improvement over the past five years. This is Templeton’s preferred measure of management quality. When a company’s margin is increasing, it is earning more for each dollar of sales.

To find conservative management, Templeton looked at debt. Less debt than the industry average demonstrates to Templeton that the company is conservatively managed and likely to continue making money even in economic downturns. This is an important criterion for an investor who survived and in many ways prospered during the Great Depression.

Templeton may not be as popular as Buffett or Lynch or other investing legends. But, his work should still be studied by serious investors to learn about value investing.

Cryptocurrencies

Is the Selloff in Cryptos a Buying Opportunity?

Posted on February 5, 2018February 2, 2018 by Team Editor

Market declines follow a predictable pattern in some ways. Bears claim vindication. It doesn’t matter that large gains were possible before the decline or that large profits were taken. It also doesn’t matter that prices are still up compared to where they were a year ago.

When prices fall, bears like to say, “I told you so.”

That might seem like a good idea, but a better idea would be to ask “is this is a buying opportunity?” With the recent crash in cryptos, now is an ideal time to consider what cryptos might be worth.

Valuing the Potential Market Size

Cryptos don’t have earnings and they don’t generate cash flow. In this way, they are similar to gold. If you own gold, you know you are doing so to protect or grow wealth. You understand there are no potential dividends and if you own physical gold there could even be costs associated with holding the position.

Despite its shortcomings, gold has value.

Gold from 1992

That value fluctuates over time and there will be declines in value but, overall, gold always has some value despite the fact that there is no rational way to value gold.

However, there could be a target value for gold, or other assets that don’t generate cash flows. Many investors believe that they should place 5-10% of their portfolio into gold. Not all investors own gold so the likely percentage of wealth in gold is likely to be less than 5%.

Knowing how much gold is available for purchase and how much wealth there is in the world we could then derive a target value for gold.

Well, that same approach could be applied to bitcoin as one economist did. Tyler Cowen, of George Mason University, wrote:

“This estimate claims there is $241 trillion of wealth in the world, make of that what you will (there is something nonsensical about such aggregate measures because they are not traded against anything). If you imagine people wish to hold one quarter of one percent of that in crypto form, that gets you to about $600 billion in value.”

How Well Does That Approach Work?

Let’s go back to gold. The World Gold Council estimates that all the gold ever mined totaled 187,200 tonnes in 2017. There are about 35,274 ounces in a metric tonne. With a gold price of about $1,330 per ounce, one tonne is worth about $46.9 million.

The World Gold Council estimates that about 40,000 tonnes of gold is held by private investors. This would be about $1.88 trillion worth of gold, or about 0.8% of wealth. When government holdings are added to the calculation, about 1.5% of wealth is in gold.

We know that many investors ignore gold and others gain exposure through mining stocks. The estimate of 1.5% of wealth in gold positions is most likely in line with the total holding of the metal, and exchange traded finds (ETFs) backed by the metal.

This approach is necessarily inexact but, based on the value of gold, this approach does seem to be a reasonable basis for valuing the aggregate holdings of an asset class that produces no cash flows of any kind for its investors.

Cryptos fit into that category. New reports from Venezuela indicate there is at least some degree of similarity between gold and bitcoin in a crisis. As one story noted:

“In the midst of a financial crisis with inflation nearing 2,000%, Venezuelans are using bitcoin to pay for groceries, medical bills, even honeymoons. Unaffected by the economic crisis, bitcoins gives users an alternative to black market worthless government currency.”

The same was true in Zimbabwe and in some ways, digital currencies may be more appealing than gold to many individuals as a crisis hedge. It’s more portable and can easily cross borders without being confiscated.

Valuing Bitcoin

Now, returning to Cowen’s estimates. He is most likely being conservative suggesting that investors will be allocating perhaps 0.25% of their wealth to cryptocurrencies. But, as with gold, the total will be smaller than expected because many investors will not participate in the market. It might be 0.5% or even 1% but is unlikely to be much more than that.

Recent data shows that the total market capitalization of all cryptos is about $507 billion. The market capitalization, or market cap, is equal to the cumulative value of digital currencies that are traded.

Total Market Capitalization

Source: CoinMarketCap.com

After the recent selloff, cryptocurrencies could be considered undervalued since they now represent less than 0.25% of total wealth. Of course, the value of total wealth will fluctuate as well over time and in fact could be lower than $241 trillion after the recent selloff in stocks.

However, gains in bonds will at least partially offset losses in stocks for many investors and other investors will benefit from trades in volatility products. Real estate assets could also increase in value. In other words, the real value of wealth will change but may not change as much as expected by some.

In cryptocurrencies, bitcoin represents about a third of the total market. That provides a target market cap of about $200 billion. Recent price declines have pushed the value of all outstanding bitcoins to less than $150 billion.

Based on that method, bitcoin is potentially undervalued by more than 30%.

Bitcoin charts

Source: CoinMarketCap.com

Now, at its peak, under this method, bictoin was potentially overvalued. The target value for bitcoin, using this valuation model, is about $11,800.

A Trading Approach

Of course, the method described here could be applied to any digital currency that is traded. According to one source, there are more than 1,500 currencies being traded. Each of these will have some share of the market and that market share could be used to find a target value.

This approach makes trading digital currencies similar to trading stocks in at least one way. Valuation would be the driving force behind buying and selling. This would be a disciplined approach to trading the market.

As a relatively young market, the concept of valuation might not be in widespread use. That should change, in time. But even before valuation models are generally accepted in the market, traders following a disciplined approach to buying and selling should have a better chance at profits than traders acting in an undisciplined manner.

We do know from more mature markets that disciplined investors tend to fare better over time. And there is no reason to expect that rule not to apply in new markets like cryptocurrencies.

Weekly Recap

Weekly Review

Posted on February 2, 2018February 5, 2018 by Team Editor

Can the Government Take Your Bitcoins?

Reading the words can be chilling for Americans. On April 5, 1933, the government confiscated the gold of American citizens. It didn’t even require an extensive debate or an act of Congress. This action was taken under an executive order, President Franklin Roosevelt’s infamous Executive Order 6102.

The purpose of the order was clear from its name, “Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government.”

If the government can take your gold, can they also take your Bitcoin? Continue reading here.

Beyond P/E Ratios: A Better Way to Evaluate Companies

The core of the value investing process is to apply a valuation tool to stocks in order to identify whether the stock if overvalued or undervalued. These metrics often combine a stock’s price with a piece of information found in the financial statements.
One example of a valuation metric is the price to earnings (P/E) ratio. To find the P/E ratio, analysts divide the price of one share of stock by the company’s earnings per share (EPS). In general, low P/E ratios generally define a stock that is undervalued and high P/E ratios are associated with overvaluation.

In this article, we discuss other effective valuation methods. Continue reading here.

Watch For Mergers and Acquisitions, and Big Gains, In This Sector

Mergers and acquisitions (M&A) are among the events that move markets. But, M&A activity tends to be unpredictable. The recent acquisition of Dr Pepper Snapple Group, Inc. (NYSE: DPS) shows both the unpredictability and the potential rewards.

The announcement of the deal was a surprise. However, it was a pleasant surprise to share holders of DPS who saw the stock price rise by more than 32% on the morning the deal was announced.

Continue reading about this pleasant surprise and more, here.

Real Estate Income Without Owning Real Estate

Investors often understand the value of a real estate investment. Property values tend to rise over time and can deliver steady income as they appreciate. Of course, real estate prices can fall, and they have fallen in the past, but investors can diversify to reduce the risk of price declines.

You can enjoy real estate income without actually owning real estate. Continue reading here.

Passive Income

Real Estate Income Without Owning Real Estate

Posted on February 1, 2018February 19, 2018 by Team Editor

Diversified real estate investment portfolios might include a mix of rental properties scattered in several regions of the country along with exposure to undeveloped land and construction projects. Or, it could include a mix of residential and commercial properties.

No matter what it includes, a diversified real estate investment portfolio designed to generate passive income can be expensive and is, in all honestly, perceived to be beyond the reach of many individual investors.

Solutions to This Problem Are Available

Peer to peer real estate crowdfunding is s potential solution to some of the problems with real estate investing. In simple terms, these are “crowd investing” platforms that allow individual investors to fund part of a mortgage, land acquisition or construction loan or become a part equity owner.

This is perhaps not as well known an investment as stocks or bonds but it is a growing and there are a steady inflow of new competitors in this sector. That means you have the ability to select the platform that best meets your needs.

The exact structure of the platforms vary and we will look at just two of the options available to smaller investors to provide an overview of the sector. We will explore other options in this sector in future articles.

A Do It Yourself REIT

Many individual investors are familiar with real estate investment trusts or REITs. These are companies that own, operate or finance income-producing real estate. REITs often trade on major exchanges alongside stocks and exchange traded funds and provide investors with a liquid stake in real estate.

The advantages of REITs include diversification and liquidity. But, investors often pay steep fees for that liquidity. A crowd funding site like Fundrise is an alternative to this type of investment.

Fundrise allows individuals to invest online in commercial real estate via eREITs and eFunds. Individuals can gain access to real estate deals without the high dollar commitment typically needed, without being an accredited investor and without paying the high front-end load fees.

However, it is important to remember that these are illiquid investments which means that your investment capital could be tied up for years in a Fundrise account.

Investors can participate in real estate deals through Fundrise with as little as $500 of capital and they can receive monthly income through this platform. It is possible on many deals to reinvest dividends if you choose to in order to compound wealth.

Returns can be higher for illiquid investments and this is true for a recent deal that Fundrise was offering. Investors with as little as $500 were able to obtain passive income at an annualized rate of 7.33% per year.

dividend yield

Source: Fundrise

The company reports historic returns that exceed these projected amounts.

Fundrise investments

Source: Fundrise

Be A Hands On Real Estate Investors Without the Hassle of Owning Property

Groundfloor is a an online platform specializing in lending for single-family or small multi-family home rehab and renovation loans. The firm provides access to short-term, high-yield returns with a minimum investment of as little as $10. Typical loans return 6% to 14% annually and loans generally carry a term of six to twelve months.

A real estate investor secures a loan through Groundfloor rather than a traditional bank or a hard money lender to finance a residential real estate project. That borrower submits a loan application and after review, the loan is assigned a loan Grade A through G and a corresponding rate where Grade A loans are the least risky, with the lowest rate of return and Grade G loans are most risky.

Grade A loans generally offer returns of 5.5% and Grade G loans generally offer returns of 26% with each letter grade offering a rate within that range.

As an investor, you can browse the summary view of loans funding on the Groundfloor web site or view more information on the loan detail page for each loan. You decide when, how much, and where to invest money. Investing is simple and efficient.

With Groundfloor you are, in effect, allowed to create your own REIT. When you invest your money with a REIT, the REIT manages your risk and reward. With Groundfloor you choose how much, when, and in which projects to invest. You are in control of your money and you manage your own risk and reward.

To select investments, investors browse the web site which shows detailed information on properties and borrowers.

real estate

Source: Groundfloor

A Different Source of Passive Income

Using Groundfloor’s reported performance, we can compare this do it yourself REIT investment to multiple alternatives. On average, Groundfloor’s returns beat the stock market trading and fixed income investments.

market comparison

However, individuals will be able to determine how much risk they are willing to accept and that will have a large impact on their potential returns. While the 2017 average rate of return was 12.83%, it is important to remember that some loans earned more than that and others earned less than that.

This is obvious and is, in fact, how averages work, but it is a point that must be stressed. When making any investment, including investments for passive income through real estate, risks must be considered.

Company data provides information on loan performance in 2017. The data shows that 127 loans were current in their obligations or repaid in full. There were 31 identified as “subject to workout” and 1 identified as “subject to fundamental default.”

The precise meaning of these terms is available at the company’s web site and are of interest to potential investors, but our purpose is to highlight the risks associated with these investments.

Just one of the 159 loans in this sample was in the worst category, and that is a statistically admirable feat demonstrating that Groundfloor is performing due diligence on its loans and delivering extraordinary results for its investors.

However, we urge investors to consider what it would mean if that one loan was the loan they had invested in.

Crowd funding real estate is an investment opportunities that investors should be aware of and is something income investors should consider as a source of passive income. However, the risks should not be ignored and illiquidity should be considered when making the investment.

As always, consider both the potential gains and risks when making any investment.

Stock Picks

Watch For Mergers and Acquisitions, and Big Gains, In This Sector

Posted on January 31, 2018February 19, 2018 by Team Editor

The announcement of the deal was a surprise. However, it was a pleasant surprise to share holders of DPS who saw the stock price rise by more than 32% on the morning the deal was announced.

Because of the possibility of outsized gains like that, some analysts are always on the hunt for potential deals. One analyst recently tapped the software industry as a potential source of M&A deals in the next few months.

Deal Making Could Soar

Deal making tends to go in and out of fashion. The reason for that is simply the potential for profits. Right now, conditions appear to be turning more favorable for deals.

One reason there could be more deals is simply because there is likely to be more cash available to complete the deals. Under the tax reform law that was passed at the end of last year, companies are repatriating cash from overseas.

The companies will get a lower tax rate on the cash that comes back but there is no longer an incentive to allow cash piles to grow to large levels. Before tax reform, holding cash was a tax avoidance strategy. That incentive no longer exists under the new rules.

One of the sectors that has the largest cash piles is the tech sector. Analysts are looking at software companies as a potential source of deals.

But, cash is not the only reason to expect M&A activity. A rising interest rate environment may temper stock market trading gains, making target companies look more affordable, says RBC Capital Markets. And, large software companies will aim to acquire promising technology or software designed for specific industries.

“Less multiple expansion, (overseas cash) repatriation and innovation tailwinds could drive a bigger M&A year,” said RBC Capital analysts in a report.

This would mark a reversal in the software industry. M&A slowed among software companies in 2017 as a booming stock market sent the trading multiples of possible targets higher, and as some looming buyers, including Microsoft (Nasdaq: MSFT), Oracle (NYSE: ORCL), Salesforce.com (NYSE: CRM) and privately held SAP, consolidated earlier acquisitions.

Oracle recently raised $10 billion in the bond market, giving it cash to tap for acquisition, noted Terry Tillman, a SunTrust Robinson Humphrey analyst in a report.

“Oracle has made its strategic intentions well known publicly and it includes maximizing growth opportunities associated with SaaS, Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS),” said Tillman in a report.

Adam Holt, analyst at MoffettNathanson, has some specific targets in mind. He believes some large companies are likely to acquire capabilities they lack right now instead of developing every software tool in house.

Holt identified Microsoft, Oracle and Adobe Systems (Nasdaq: ADBE) as companies that fit into category. He also believes VMware (NYSE: VMW) as another potential deal maker.

Dell Could Make a Deal With VMW

According to CNBC, Dell Technologies could emerge as a public company through a reverse-merger with VMware. The reverse merger, whereby VMware would actually buy the larger Dell, would then allow Dell to be traded publicly without going through a formal listing.

It would also likely be the biggest deal in tech industry history, giving investors who backed Dell’s move to go private in 2013 as a way to monetize their deal, while helping Dell pay down some of its approximately $50 billion debt.

VMware’s stock fell sharply on the news but could be attractive after the sell off.

VMW

The stock now trades at about 22 times next year’s expected earnings and that doesn’t include potential benefits of a deal.

Watch the Hottest Companies

Some analysts noted that for many buyers, the focus is expected to be on fast-growing software-as-a-service, or SAAS, companies. The customers of SaaS vendors purchase renewable subscriptions, rather than one-time, perpetual software licenses. Customers receive automatic software updates via the web.

The SaaS software market rose 23% to $43 billion worldwide in the first half of 2017, according to data provided by market research firm IDC. The overall software market will grow 8.5% in 2017 and 2018, says Gartner, another market research firm. This means SaaS companies are gaining share overall.

While some SaaS markets are maturing, such as human resources and customer relationship management, SaaS companies are expanding into analytics, IT services, financial and other areas.

While revenue growth has been the strong point of many SaaS companies, Goldman Sachs says some could face top-line pressure going forward, making them more amenable to being acquired at the right price.

“Our view is that the wave of M&A is slowly beginning to build, and we would expect to continue to see a healthy dose of best-of-breed vendors consolidated into both legacy software vendors like Oracle and SAP, as well as ‘born-in-the-cloud’ vendors like Salesforce and Workday,” said a Goldman Sachs report.

Goldman Sachs says targets could include Zendesk (NYSE: ZEN), Cornerstone OnDemand (Nasdaq: CSOD), or HubSpot (NYSE: HUBS).

Holt, the MoffettNathanson, analyst, believes that Workday (Nasdaq: WDAY) and ServiceNow (NYSE: NOW) are on “several wish lists” but their valuation soared in the first nine months of 2017. Both stocks have been market leaders and remain richly priced.

WDAY and NOW

Workday sells software for human relations, payroll and other business functions. The company has expanded from the human capital management (HCM) into financial software.

Salesforce.com, a pioneer in SaaS, is also a potential target according to some analysts. The company sells software that helps businesses organize and handle sales operations and customer relationships. Salesforce.com has expanded into marketing, customer services and e-commerce.

Salesforce.com has forecast organic revenue growth over 20% through 2022. But, it could be a buyer, according to analysts at William Blair.

“There is the potential for a mega SaaS tie-up (Salesforce/Workday being the granddaddy of them all), though our sense is the odds are greater for acquisitions to be driven by the on-premise (Microsoft, Oracle) vendors,” said a William Blair 2018 outlook report.

One trend that could accelerate M&A within the software industry are partnerships with cloud computing vendors Amazon Web Services, Microsoft and Alphabet-Google.

AWS and Microsoft’s Azure service rent computing power and data storage to large companies via the internet. They’re also moving into software-related “PaaS”, or platform as a service, which involves selling apps that run on cloud infrastructure.

More large companies are shifting business workloads from private data centers to cloud computing services.

“PaaS is disrupting traditional enterprise software much faster than most realize,” said a Cowen report. It estimates that the PaaS market jumped 50% to $8.5 billion in the first half of 2017.

Acquisitions could deliver quick gains and investors should consider companies cited by top analysts as potential buys.

Value Investing

Beyond P/E Ratios: A Better Way to Evaluate Companies

Posted on January 30, 2018January 30, 2018 by Team Editor

Value investing is a simple process in theory. The goal is to find a stock that is priced at a discount to its fair value and buy it. Then, hold it until the stock is fairly valued or even overvalued and sell it. It’s simply a method of buying low and selling high which is one of the secrets to success on Wall Street.

In practice, value investing is a difficult process and consistent profits can be elusive for value investors. There are many reasons for that but one of the overlooked problems with implementing value investing is that investors might be looking at the wrong numbers to make their decisions.

We don’t mean that the financial statements are wrong. They may be, but as investors we must assume management is accurately and fairly presenting the data in those statements. What we mean is that investors might not be using the best tools to analyze the data.

Defining Value With a Popular Indicator

One example of a valuation metric is the price to earnings (P/E) ratio. To find the P/E ratio, analysts divide the price of one share of stock by the company’s earnings per share (EPS). In general, low P/E ratios generally define a stock that is undervalued and high P/E ratios are associated with overvaluation.

The P/E ratio is popular and can be profitable. In part, the popularity could be due to its simplicity since just two pieces of data are needed to calculate the ratio. But, the simplicity could be a source of some of the problems with the ratio.

The P/E ratio looks only at earnings, a number which is found on the company’s income statement. It ignores information found on the balance sheet, for example, and there could be problems lurking in a company’s balance sheet.

Consider a company that has issued a large amount of debt. The debt is not directly factored in to the P/E ratio. But, eventually companies need to repay debt when the bonds reach maturity. If a company is unable to meet that obligation, the company could be forced into bankruptcy.

In theory, the risk of that should be factored into the stock’s price. However, investors relying solely on the P/E ratio would simply see a low value and could believe the stock was undervalued. Unfortunately, the low price could reflect a negative outlook for the company.

Moving Beyond the P/E Ratio

To overcome this limitation, many investors look at multiple indicators. They may look at the price to sales (P/S) ratio, the price to book (P/B) ratio or the price to cash flow (P/CF) ratio. All of these tools are useful, but all also reflect the information from just one part of the company’s financial statement.

A tool many investors ignore is the EV/EBITDA ratio. This is the enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio. It includes a great deal of information and could be among the best ways to measure value.

At least that was the conclusion the authors of an upcoming paper reached. Two researchers and money managers, Wesley Gray and Jack Vogel, will be publishing “Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years” in the Journal of Portfolio Management.

They have already shared their results in a book, Quantitative Value. In the book, they found that the EV/EBITDA has historically been the best performing metric and outperforms many investor favorites including the P/E ratio and the P/S ratio.

Their study looked at the period from July 1, 1971 until December 31, 2010. Some results are summarized below.

average return

Source: Gray and Vogel, Quantitative Value.

One reason the EV/EBITDA ratio may not be as popular as other tools is because it does involve more research to calculate.

The enterprise value of a company is a comprehensive measure of its market value. To calculate EV, you start with a company’s stock market capitalization (the number of shares times the market price). You then add the total amount of debt the company issued at current market value and subtract the amount of cash and cash equivalents they have on the balance sheet.

This would represent the total cost of acquiring a company since a new owner would be acquiring the debt as well as the equity. Cash is subtracted in the calculation because it could be used to, at least partially, finance the purchase.

EBITDA is found by adding the expenses associated with interest, taxes, depreciation and amortization to the amount of net income.

EBITA

EBITDA shows the performance of a company independent of the performance of its decisions related to taxes and capital structure. Earnings, for example, are reduced in some companies through tax strategies or by issuing debt to fund growth. EBITDA neutralizes the effect of those actions.

This ratio is available at a number of sites, including popular research sites like Yahoo and Google.

Applying EV/EBITDA

This ratio is used in practice like any other valuation metric. Low values are generally considered to be better than higher values.

This means that if you are comparing possible investment opportunities, it can be best to consider the one with the lowest EV/EBITDA ratio as long as the opportunities are in the same industry. It is important to remember as with any valuation metric, the average value for a company will depend upon which industry it belongs to.

Fortunately, there is a resource showing the average EV/EBITDA for an industry. This data is maintained by Dr. Aswath Damodaran, a Professor of Finance at the Stern School of Business at New York University who has written extensively on valuation and corporate finance.

Admittedly, the EV/EBITDA ratio may be difficult to find than the other, more popular valuation metrics that are readily available. However, in the investment industry, a popular saying among analysts is that “to know what everyone knows is to know nothing.”

This saying means that knowing information that is readily available, such as the P/E ratio, is not going to generally be rewarded with excess profits. In order to excel in this competitive field, you will be better served by finding information that is less readily available and less widely used.

The EV/EBITDA is widely used among professional investment managers and among investment bankers completing mergers and acquisitions. However, it is not widely used by individual investors and that can provide an edge, or an extra degree of profits, to individuals willing to work a little harder in pursuit of profits.

Cryptocurrencies

Can the Government Take Your Bitcoins?

Posted on January 29, 2018January 28, 2018 by Team Editor

The purpose of the order was clear from its name, “Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government.”

The words were also clear. “I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section do hereby prohibit the hoarding of gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations…”

Executive Order 6102

Citizens were required to turn over all gold to banks or government offices by May 1, just a few weeks after the order was issued. Violations, or the possession of gold, were subject to finds of up to $10,000 and up to ten years in prison.

Individuals were paid for their gold at the market price of $20.67 an ounce, equivalent to $398.03 in 2017 dollars.

Could It Happen Again?

Of course, the confiscation of gold happened more than eighty years ago. It seems unlikely that the government would repeat that process today. But, it is reasonable to consider whether or not the United States or other governments could confiscate bitcoins or other cryptocurrencies.

So far, several countries have threatened to regulate cryptocurrencies.

South Korea has been in the headlines with proposed regulations and rumors about the rules have sparked several bouts of selling in the global market. The country currently has no bitcoin regulation. But the government recently announced plans to deal with digital currencies including bitcoin and ether.

In August, a lawmaker introduced an amendment to the Electronic Financial Transaction Act that provides a regulatory framework for digital currencies. It outlines requirements and prohibited activities of anyone and entities dealing with digital currencies.

While bitcoin is not legalized, its use as a method of foreign exchange transfer for small amounts is. Financial technology companies in the country obtain a permit allowing them to legally offer Bitcoin international transfer services for small sums.

However, in a recent court case, traders received some good news that the coins cannot be confiscated. The court ruling said, “It is not appropriate to confiscate bitcoins because they are in the form of electronic files without physical entities, unlike cash…Virtual currency can not assume an objective standard value.”

In addition, the court continued, “it is difficult to calculate the value of the virtual currency even if it should be added. In some cases, even if virtual money is recognized as a criminal profit, it means that it should be calculated by calculating the corresponding amount instead of confiscation,” the publication conveyed the court’s explanation.

Regulation in the US

Obviously, a court ruling in South Korea is not binding on courts in the US. And, the US federal system adds a level of complexity to potential regulation.

The federal government has not yet claimed the right to regulate cryptocurrencies exclusively. The only concrete statements made about cryptocurrency from federal entities concern how people must report their profits (capital gains to the IRS), and how they’re taxed (as property).

In other words, the federal government, for now, is simply concerned about getting tax revenue.

Several states have jumped into the void and so far, New York, Arizona, Maine, Nevada, Vermont, and others have introduced bills to their state senates, mostly dealing with the acceptable use of blockchain ledgers and smart contracts for record keeping and other tasks.

The Securities and Exchange Commission (SEC) could also regulate cryptocurrencies. The agency has already reviewed requests to consider approving exchange traded funds (ETFs) based on cryptos. No approval has been granted and the SEC, in fact, has been asking important questions.

Specifically, in a recent letter, the SEC asked:

What steps would funds investing in cryptocurrencies or cryptocurrency-related products take to assure that they would have sufficiently liquid assets to meet redemptions daily?
How would funds classify the liquidity of cryptocurrency and cryptocurrency-related products for purposes of the new fund liquidity rule, rule 22e-4? For example, would any of these products be classified as other than illiquid under the rule?
If so, why?
How would funds take into account the trading history, price volatility and trading volume of cryptocurrency futures contracts, and would funds be able to conduct a meaningful market depth analysis in light of these factors?
Similarly, given the fragmentation and volatility in the cryptocurrency markets, would funds need to assume an unusually sizable potential daily redemption amount in light of the potential for steep market declines in the value of underlying assets?

These are important questions and in many ways should offer investors some level of assurance that the government would not consider confiscating or outlawing cryptocurrencies at some point.

This Times Is Different

As we all know, it’s not 1933 anymore. If the current president were to issue an executive order like the one Roosevelt signed, it would be challenged in court. Experts could argue over the likelihood of the success of the challenge.

But, the challenge itself would at the very least delay any government takeover of a cryptocurrency.

It is also to remember that markets have evolved since 1933 and were truly within a global marketplace. That means if the government moved to confiscate a cryptocurrency, traders could most likely obtain market value for their investments or even transfer the security to a location where trading was legal.

Short of confiscation, there are other steps the government could take.

In Germany, for example, bitcoin is considered a “unit of account” and its citizens are free to trade it as they wish. However, it’s also taxable and must incur Value Added Tax (VAT) when traded with euros.

Taxes could be imposed in a variety of ways and at a variety of levels. That could be the gravest threat to bitcoin trading.

After all, “the power to tax is the power to destroy,” Chief Justice of the Supreme Court John Marshall wrote in an 1819 case that was later cited by Chief Justice John Roberts in a more recent case.

It is the power to tax that could harm cryptocurrencies rather than the threat of government confiscation. And, taxes should be an area of concern for all traders.

To read more about cryptocurrencies and other market related topics, click here.

Weekly Recap

Weekly Review

Posted on January 26, 2018February 19, 2018 by Team Editor

Cryptos as Part of a Balanced Portfolio

Individual investors often think of a balanced portfolio as one that holds stocks and bonds. One of the most popular approaches is to allocate 60% to stock market investments and 40% of the account’s value to fixed income or bond market investments.

Investment professionals tend to think of a balanced portfolio in terms other than stocks and bonds. They may add an allocation to real estate or commodities, for example. At the extreme are funds that diversify broadly.

Investment Secrets of Peter Lynch

If you are new to investing, you may not be familiar with Peter Lynch. He was one of the world’s greatest investors, but he retired before great investors became celebrities and fixtures on CNBC.

His career began in the way many Wall Street careers began years ago. In 1966, Lynch was hired as an intern with Fidelity Investments partly because he had been caddying for Fidelity’s president, D. George Sullivan, at a local country club.

Artificial Intelligence: From Buzzword to Investment Strategy

Investment news, and even general news stories, tend to be filled with exciting buzzwords about technology. There are driverless cars in our futures, computers that are replacing humans in the decision process and robots ready to take all of our jobs. The common theme in these technologies is artificial intelligence.

Artificial intelligence is simply the idea of using computer programs to duplicate the brain’s ability to learn and make decisions. We already use artificial intelligence, or AI, in many ways.

Passive Income From the Stock Market

Income is elusive in the current market environment. Interest rates are low as are the yields on stocks, in general. This means investors seeking income often need to accept more risks. However, income investors tend to be risk averse and that sets up a problem in this low interest rate world.

There are few absolute rules in investing, statements that are always guaranteed to be true. One of the absolute truths is that the only way to obtain a higher yield is to accept more risk. Income investors are forced to accept risk, but there are steps they can take to reduce risk.