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The Independent Investor: What You Need to Know (But Don't) About Buying an IPO

By Bill Schmick
iBerkshires columnist
An initial public offering of a stock, called an IPO, can be either a sucker's game or a chance for instant riches. Determining the outcome requires a great deal of work, knowledge, and luck. Most investors have none of the above when it comes to IPOs.
 
I want to share with you a recent conversation I had with a conservative client (a vegetarian and yoga teacher) on this subject.
 
"I want to buy some stock of this company that makes a vegetarian form of hamburgers. How do I do it?" she asked.
 
"Why do you want to buy it?" I asked, before explaining the mechanics of such a purchase.
 
"Well, it tastes really good, all my friends love them, so I'm sure it's going to be a great stock since more and more people will switch to this healthy choice of food."
 
What's wrong with this picture?
 
No. 1, her analysis is full of holes. Her first mistake is failing to recognize three crucial differences. A good product does not necessarily translate to healthy corporate profits. Many a company with a good product has failed miserably because they did not have the knowledge, experience and financial acumen to make a go of it as a public company in a competitive marketplace.
 
No. 2, it does not necessarily follow that a company with good fundamentals will also perform well in the stock market. There are thousands of cases throughout financial history where companies that IPO never again reach their offering price.
 
And three, if you think it is hard enough to analyze the fundamental valuation and technical position of an already-established public company, imagine the difficulty in trying to do the same for a company with no historical data, and even worse, that sells a new or innovative product that is little understood.
 
Let's look at some of the other mistakes in financial logic my client is making. How many vegetarians are there in the U.S. versus meat eaters? The latest research (2017) put the number at 7.3 million Americans or 3.2 percent of the country's population. That's not a very big market, but she believes that once more people "discover" this non-meat burger, they too will find religion and give up meat.
 
Going public, however, won't change that. This particular company is already distributing its products (non-meat, non-chicken and non-sausage) in dozens of national food chains and stores throughout the nation and overseas.
 
She also needs to recognize that if this plant-based array of products is so good, competitors won't just sit still, they will imitate and offer their own plant-based products. In this case, it is already happening. Burger King is marketing a meatless "Impossible Burger." Reports indicate it is at least as tasty as my client's company's product.
 
Buyers of IPOs should also be aware that these offerings are normally handled by big brokerage houses that know how to promote a new issue and will, for a short time, support its price. Normally, brokers insist that company insiders have a "lock-up" period for a few months before owners and employees can sell their stock. When the lock-up period is over, an avalanche of sell orders hits the market. A look at most IPO stock prices a few months after going public shows a steep drop in price, most often well below the offering price.
 
Some retail investors don't care because they are planning to "flip" the stock. You buy the IPO after it begins to trade (usually at a higher price than the initial offering price), and then sell it for a profit over the next few days. That's where your luck comes in. Your odds of making money are equal to how much hype there is surrounding the stock.
 
Don't be fooled, some IPOs do skyrocket and never look back. You can take your chances, or have some patience, wait a few weeks or months and then, after doing your homework, make your investment. It's not as exciting, but it has been proven to be a better investment style over time.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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The Independent Investor: CBD Is a Real Market

By Bill Schmick
iBerkshires columnist
Cannabidiol is popping up all over the country. Local drug stores, supermarkets and health food shops, among other retailers, can't seem to get enough of this stuff on the shelves. Is this a fad, a fake, or does it have some real health benefits?
 
It's called CBD, for short, and this oil can be eaten, inhaled, and/or applied to the skin.  It is a substance extracted from the flowers and buds of the marijuana and hemp plant. And no, before you ask, you can't get high from it.  
 
Back in the day, (when I had hair to my shoulders, along with my buckskin jacket) I simply smoked marijuana or ate it in cookies. It contained THC. THC, a chemical, attaches to the CB1 receptors in the brain and triggers all those familiar sensations like increased appetite, giddiness, moods swings, etc.  Unlike THC, CBD was at first thought to attach to the CB2 receptors, which does not trigger psychoactive sensations. You don't get a buzz from it, although for someone like me that is no longer important.
 
The FDA allows CBD to be prescribed for epileptic seizure disorders and other ailments, but the research for other uses is till ongoing. Most consumers are using it for things like anti-inflammation and pain, especially for arthritis and injuries. Diabetes and acne are also conditions where CBD is used. Others believe it may have properties to treat Alzheimer's disease. Whether any of these claims are true, will be borne out in time through research.
 
Given my own arthritis issues, I decided not to wait to try it on my neck problems. It worked. The pain vanished for an entire day. I gave some to my neighbor, who has the same condition. It worked on him as well. Certainly, that is no scientific study, just personal experience. Now, what you should know is that CBD can be derived from both hemp and marijuana plants, which are similar, but not identical. Thanks to the Agricultural Improvement Act of 2018, hemp is now legal to grow and sell. Marijuana is not.  The CBD, which is derived from hemp is legal, as long as it contains less than 0.3 percent THC.
 
Sales of hemp-derived CBD oil four years ago was around $90 million. By next year, sales are estimated to top $450 million. If, over the next year or so, the federal government allows marijuana-derived CBD to be legally sold, the CBD market could generate as much as $1.2 billion in revenues.
 
CBD crystals are the purest form of the product. It can be dabbed, made into a tincture, or used as an edible by mixing it with high-fat foods. Topicals and salves can be sold as soap, lotions, even shampoos. It can be inhaled as a wax or inhaled as a vapor, as well as eaten in chocolates, baked goods, and even gummy bears. Pills and capsules are now marketed as nutritional supplements as well.
 
By the way, Titus, our ten-year-old Chocolate Lab, has been eating CBD-infused snacks for over two months now. Like me, Titus suffers from arthritis (me in the neck/back, him in both shoulders). Since he has many of the same brain receptors that I do, CBD works well on his arthritis as well
 
While pot stocks overall remain the darlings of the stock market, at least those companies that sell the legal form of CBD may have some real value. As for the companies that market the THC-based products, the risk is much higher. Under federal laws, growing and selling marijuana is not legal, at least until the U.S. government and more states pass new legislation that would legalize those products. That should happen within the next 12-18 months, according to both company managements as well as some legislators.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

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The Independent Investor: The Cost of Rebuilding God's House

By Bill Schmick
iBerkshires columnist
Sometimes a tragedy can bring people together. In the case of the devastating fire that swept Paris' Notre Dame Cathedral, the world wept. But even before the fire was completely extinguished, the business community was already making plans to rebuild the 850-year-old edifice.
 
The price tag will likely be in the multibillion-dollar range. A preliminary assessment of the damage thus far includes two-thirds (about 100 meters) of the roof and the destruction of a spire, which the world witnessed on television. At least a 62-foot expanse of stained-glass windows was also severely damaged.
 
What we don't know as of yet, is how the 800-pipe organ, one of the largest in the world, fared through the fire. Much of the art work has been saved thanks to the 400 firefighters, who, in addition to battling the blaze, carried artwork and priceless relics, such as Christ's crown of thorns, to safety. In a stroke of luck, an additional 16 ancient religious statues had already been removed last week for cleaning.
 
Many architects worry that the fire could have weakened the stonework of the cathedral. Hand-carved over 200 years of construction, the ancient stone can turn to dust in extreme heat through a process called calcination. Pouring cold water on that hot stone can also cause it to weaken and crack. The two rectangular bell towers were saved, despite the fire's spread into one of them, and credit for that accomplishment should go to the French firefighters, who battled the blaze for 15 hours.
 
Before the last smoke cleared, business leaders were already pledging their support to re-build. Within 24 hours of the disaster, two of France's richest men pledged 300 million euros to re-build the historic landmark. By Wednesday morning, that total has climbed to 450 million euros with the largest donation made by the LVMH Group. LVMH owns Louis Vuitton, Givenchy and Christian Dior and has pledged 200 million euros ($226 million). The Pinault Family, which controls Kering, a French luxury brand that owns Gucci and Yves Saint Laurent, chipped in an additional $113 million ($100 million euros)
 
But the economic blow will go far beyond the damage to the cathedral itself. Over 50,000 visitors per day (an estimated 13 million a year) make the pilgrimage through the dark, candle-lit interior of the church and into its crypt. Although the cathedral is free to enter, it costs 8.50 euros to experience the tower and an additional 6 euros to explore the crypt. I did both on my last excursion to Notre Dame and it was well worth it.
 
If I assume only half of those tourists are like me and are willing to pay the additional charges, it still comes to as much as $225 million per year in revenues. But maintaining those hallowed halls is not cheap. Basic renovations cost in excess of $4.5 million per year. There are also estimates that just conducting essential structural work in the future would require almost $200 million, and that was before the blaze. 
 
The cathedral has survived more than its fair share of misfortune through the years. It was a target of protest during the French Revolution, for example, when it sustained considerable damage. Twenty-eight statues of biblical kings in the cathedral were pulled down with ropes and decapitated by mobs. Its bells were once melted down for artillery cannon. At one time, it was used as a warehouse.
 
Napoleon Bonaparte was crowned emperor in 1804 and saved the church from demolition after centuries of decay and neglect. Restored by Napoleon and once again used as a place of worship, the church thrived. In 1909, Joan of Arc was beatified there.
 
Through the years, this premier example of Gothic architecture has been rebuilt and/or reconstructed many times. It appears that much of the present damage occurred in that part of the building that had been restored in the 19th century. The truly old parts of the church constructed in the 10th, 11th and 12th centuries escaped damage. It could have been another lucky break or maybe the silver lining in this dark cloud of misfortune.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

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The Independent Investor: Retirement Savers Could See Positive News This Year (Maybe)

By Bill Schmick
iBerkshires columnist
In this acrimonious political environment, little in the way of new legislation is expected to pass both chambers of Congress. One exception may be the Secure Act. Last Tuesday, a key House committee unanimously approved the bill, which would greatly enhance some private retirement plans.
 
The bill would not only increase the flexibility of 401 (k) plans but would also provide much greater access for small-business owners and their employees. The changes would hopefully encourage many more small businesses to offer private retirement benefits to their workers. It is the most sweeping legislation to come out of Congress in over a decade.
 
The sponsors, including the top Democrat and Republican on the tax-writing Ways and Means Committee, intend to allow smaller companies to join together to provide these plans and provide a $500 tax credit for companies that establish plans and provide their workers with automatic enrollment. It would also offer the opportunity for long-term, part-time workers to participate in retirement savings plans.
 
A case in point is Brothers Landscaping and Construction of Hillsdale, N.Y. The McNamee's established their business back in 2007. Twelve years later, the company's revenues are just shy of $1 million a year.
 
I have known these guys ever since they started cutting my lawn in 2007. Hard-working, conscientious, and honest to the bone, it is men like these who are the backbone of this country. James, 29, called me a few weeks ago to explore opening a 401 (k) plan for he and his 28-year-old brother, Tucker, as well as four additional employees.
 
"We felt we had to do it in order to compete with much larger companies in our region," James explained. "Our work force ranges from 21 to 29 years old and we need to keep our key qualified help around through providing added incentives."
 
Although Brothers Landscaping has several additional valuable, part-time employees, under the exiting rules, they do not qualify to be included in the plan. The McNamees are hoping that the Secure Act finally becomes law. They are planning to embrace its key provisions wherever they can.
 
The legislation also benefits older workers like me. It would repeal the maximum age for IRA contributions. Today under the old laws, at 70, I can no longer contribute to my traditional IRA.  I am also required to take a mandatory minimum required distribution (MRD) from my tax-deferred IRA at 70 1/2. The Secure Act would repel the maximum age provision and push back my MRD until I reach 72 years of age.
 
It also allows 529 educational plans to cover home schools and student loans in addition to college-related expenses. That could be a big boon to parents and students alike who are drowning under educational loan debt.
 
The Senate Finance Committee introduced a companion bill last week as well. The legislation is an acknowledgement by Congress that more and more Americans are facing a "retirement crisis," according to Chairman Richard Neal, D-MA. Over one-third of all Americans have less than $5,000 saved towards retirement (21 percent have saved nothing at all), according to Northwest Mutual's 2018 Planning and Progress Study.
 
Obviously, Social Security benefits, which were never intended as a retirement vehicle, are not going to cut it for those who haven't saved enough. As such, more and more older Americans are going to need to continue working and saving if they expect to survive financially. To make matters worse, Americans are living longer, which is a mixed blessing, since we will need more money for longer to make ends meet in our advanced years.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

 

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The Independent Investor: Coffee Prices at 13-Year Lows

By Bill Schmick
iBerkshires columnist
A few days ago, arabica coffee futures prices fell to a price they haven't seen since December 2005. But don't expect your morning cup of coffee to reflect those cheaper prices. The coffee business doesn't work like that.
 
Normally, when the price of a commodity falls (like oil), consumers can expect to see a drop in price at the gas pumps within a week or three. The same thing might happen if the price of beef, wheat, corn or any number of commodities experienced a decline in price, so why not coffee?
 
You might guess (as I did) that the demand for coffee by consumers must be falling, but that's not the case. In fact, more Americans are drinking at least one cup of coffee per day, if not more, than at any time since 2012.  Over 64% of Americans drink a cup of the brew daily.
 
In order to understand this disconnect between the prices we pay at our local Starbucks or Dunkin Donuts, and the money that growers receive in places like Colombia, Brazil and Vietnam, we need to understand the present state of coffee production. Too many farmers are growing too much coffee. We call that "oversupply."
 
One of the culprits is government, which, in the case of Colombia, offered additional incentives for farmers to grow more coffee. In Brazil, where growing any sort of food is a big business, they decided to step up their coffee production. At the same time, the cost of growing coffee is also climbing, as costs of labor, energy, equipment, etc. keep rising. 
 
Last year, Colombian coffee farmers were getting $1.08 per pound for their coffee, while the costs were closer to $1.40/pound. It has hurt Colombian farmers so badly that the Colombian Coffee Growers Federation is warning that it may stop trading coffee on the New York Stock Exchange altogether.
 
So, what makes consumers continue to pay more and more for their coffee? At the risk of dating myself, the year I was born, a cup of coffee cost my Dad 27 cents. Since then, it has climbed and climbed. Recently a survey by 24/7 Wall St, a business blog, tracked the price of a cappuccino today worldwide.  In America, the price of a regular cappuccino cost $4.02.
 
The fact that a cappuccino was used instead of a simple cup of joe is instructive.  A cappuccino is equal amounts of espresso, steamed milk and foamed milk. It is one of the most popular drinks in the world, but it isn't all coffee.  Thanks to Starbucks and others who followed their lead, today's coffee drinkers rarely drink simple black coffee.
 
The next time you are in your local coffee shop glance at the menu. You may have a hard time spotting that plain coffee among the eggnog, pumpkin, salted caramel, chocolate, hazelnut, cinnamon, gingerbread and a dozen other ingredients that go into today's popular drinks. Consumers, for the most part, are now drinking coffee-based beverages. Increasingly, the amount of coffee in each cup is less and less. All those other ingredients keep climbing in price and make up more and more of the cost of that coffee cup to the seller.
 
That's not all, however. Rent, labor, local mandates and regulations, competition, distribution, marketing and last, but not least, commodities associated with your beverage of choice overwhelms that simple cup of black java.
 
It's my bet that you won't see a decline at the coffee counter any time soon, if at all. There may be some hope for the coffee growers, though. Some commodity experts are predicting coffee prices may rise by 20% or so in 2019, although so far that has not been the case.
 
They point to the fact that heavy-weight Brazil will have an off-year in production due to their practice of biennial production cycles. If so, the growers may keep their heads above water. Of course, any increase in costs will most assuredly be passed on to us at the coffee counter.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



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