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A Native Guide to Investing: How to Pick Stocks Out of a Crowd

The Alibaba IPO coincided with my first column on individual stocks, so I explained why I decided not to ride that gravy train.

The Alibaba IPO coincided with my first column on individual stocks, so I used the coincidence as a reason to explain why I decided not to ride that gravy train. BABA is, as everyone predicted, rolling like a big wheel.

RELATED: Alibaba’s $20b Magic Carpet Ride

The top of the original price bracket for BABA was $66, but the bracket was broadened because of early demand and the final IPO pricing was $68. The shares finished the first trading day at $93.89, and lots of people traded in and out on the way up.

Nobody, of course, made out like the bandits at the investment banks that organized the show: Goldman, Sachs (Golden Sacks in my circles), Credit Suisse, Citigroup, Morgan Stanley, JP Morgan Chase—all the respectable pillars of NYSE finance, or the rogues’ gallery of bloodsucking capitalist remora fish, depending on your point of view.

The Business Insider headline said it all: “Mom And Pop Are Basically Shut Out Of The Alibaba IPO.” As I predicted in my previous column, the investment banks limited the ground floor to their peers, and in that circumstance very little could trickle down to the hoi polloi. If you were fool enough to put in a market order at the open, you could not have gotten in under $92.70 and might have paid as much as the high of the day, $99.70.

Having just neatly demonstrated how the playing field slants to favor the haves over the wanna-haves (the have-nots don’t get to play at all), why have I written so many columns urging American Indians who come from the working poor, like me, to swim with the sharks?

Because my average return across all my family’s portfolios is 21 percent and my credit union pays .5 percent on a savings account. My kids are all self-supporting, but I have two dependent elders and nine (and counting) grandkids who need educating. My retirement fund is just fine, thanks to a lot of luck, but my traditions teach that a man takes care of his family.

I confess that I enjoy beating the people who trained for finance at their own game when I do beat them, but the bottom line is, like Indians from time immemorial, I hunt to feed my family. If you know some place where the hunting is better than Wall Street, or if you have no need to hunt, then I can only hope to entertain you a little with my words here.

When I was predicting last week that ordinary people would not get a piece of the Alibaba IPO, I did not mention two indirect plays, YHOO and SFTBY, because they had already spiked in anticipation, so I did not think they would help. They also dropped when Alibaba went public. I did not try to play Alibaba indirectly because neither of these are businesses I would want to own without Alibaba.

SFTBY is Softbank Corporation, a Japanese outfit that is said to own 34 percent of Alibaba. YHOO is the ticker symbol for a familiar American company, Yahoo, said to own 22 percent. A question I have not resolved is whether those percentages reflect the actual Chinese company or the Cayman Islands shell set up for foreign investment? They could not reflect ADRs because ADRs did not exist yet.

Softbank does not lose points in my mind for being Japanese, but does for not being traded on any major exchange, and therefore not offering any of the numbers I am used to consulting to reach an opinion about value. A check of their SEC filings told me they registered 100 million ADR shares in 2012, deposited with The New York Bank Mellon. Their SEC filings go back to 2005 and they have been paying dividends, but they are not followed by any U.S. analysts I’ve discovered and they have either not qualified for listing on an exchange or have been content to trade on the pink sheets. I’m not saying Softbank shares lack value. I’m saying I can’t answer the question without putting in more time than it would be worth to me.

All companies on the pink sheets are not as mysterious as Softbank. For example, BAMXY, which makes those sexy cars labeled BMW, but BMW sales are public knowledge, and in spite of no listing on a major exchange, BMW is followed by at least one analyst, Columbine Capital, which rates BAMXY a “buy.” But SFTBY, unlike BAMXY, remains mysterious to the casual observer.

Yahoo is a different story, a known quantity, and it may illuminate dipping our toes into the world of individual stocks beyond the extremes, blue chips or “granny stocks” at one end and wild speculations on the other, since Yahoo is neither. How do you decide whether to play and what to pay?

As with so many decisions you have to make when picking stocks, some values conflict with others and you have to prioritize. It’s very important to know what you own and why you choose to own it. It’s also very important to be diversified, so that everything you own is unlikely to take a dive at the same time. These values conflict in that you can’t know about all market sectors equally.

I don’t invest in banks or insurance companies because I’m fundamentally hostile to their business models and therefore not well fixed to choose among them.

I like to play in oil and gas because I was born and raised in the oil patch. I remember when “fracking” was heaving half a stick of dynamite down the hole, and I’m used to living with oil and gas pipelines being so common that you had to be careful digging a root cellar. While I’m concerned about climate change, I know that oil and gas are not going away any time soon, even as less is used for fuel. We will need plastics and fertilizers and lubricants long after we quit burning fossil fuels to move steel boxes full of humans up and down the highways.

I also like tech stocks because the research is fun. You are called upon to imagine what a patent might be worth and why before it’s worth anything at all. My record in such predictions is mixed, but being correct can be very lucrative as well as ego-gratifying.

Yahoo is new tech become old. A couple of Stanford graduate students started it as “Yet Another Hierarchical Officious Oracle,” and the company rode the dot com roller coaster, trading at $118.75 in 2000 and $8.11 in 2001. Like most of the dot coms, Yahoo struggled to monetize the Internet.

When you invest in a company (as opposed to trade), you are buying their future earnings, usually expressed as a multiple of their current earnings. If they are not profitable, you have the prime example of a speculative stock, because you have some reason to believe they are going to become profitable in a particular time frame. Or, in the case of some “momentum stocks,” they have such an impressive cash flow that you are certain they will turn a profit as soon as they no longer need to recycle every dime to grow the business.

The test of how “expensive” a stock is is not the share price but rather how much you are paying for future earnings. At this writing, Google (GOOGL) shares sell for $597.65, which is a P/E ratio (price/earnings) of 30.21. YHOO is at $38.715 but the P/E ratio is 35.28. While that is not a great deal of difference, you still must give yourself a reason why you should pay more for Yahoo’s earnings than Google’s?

The current average P/E ratio for the S&P 500 is 19.78, so you can see that both Google and Yahoo are more expensive than a normal blue chip stock. The NASDAQ 100, where more tech stocks live, is 24.15. We expect to pay more for most tech stocks because they are growing faster.

Yahoo is trading near its highest price since it fell off the twin cliffs of the dot com bust and the terror attack in 2001. The average analyst sentiment is bearish.

Google missed the dot com meltdown because its IPO was in 2004. Google’s biggest drop was in the Great Recession, 2008-2009, but it has generally moved up from the $85 IPO. The average analyst sentiment is neutral.

Yahoo’s CEO, Marissa Mayer, is supposed to be a real hot shot, and with Alibaba trading upward, she will have a lot of cash to play with. It is also worth mentioning, because of the subject of this series, that Yahoo Finance is one of the best free sources for investment information on the Internet.

Still, the bottom line for me is that Yahoo has run through boatloads of ideas about how to make money, some of which have worked and some not. Google has scarcely begun to innovate. Think Google glasses; Google Earth and Street View; the driverless car; the endless ways to reorganize email including a call function in Gmail; the Google cloud app where I am editing this document. Right now, the only thing that makes Yahoo at all interesting is the Alibaba connection. Ditto Softbank.

Alibaba’s price at the bell on September 22 was $89.89, so it is beginning to descend from nosebleed heights. Those who are comfortable with the risks outlined in my previous column would do best to decide how much they are willing to pay for BABA, set a limit order, and wait to see whether it executes. Neither of the indirect ways to get at BABA looks overwhelmingly attractive on their own merits, although the drop after the Alibaba IPO makes the shares look cheap, with YHOO at $38.65 and SFTBY at $36.345. Remember BABA’s growth potential and that “cheap” on the stock market means a lot more than share price.

Be careful out there.