Cody Kiss & Tell: Market cap meanings, tech earnings patterns, etc

Here’s the transcript from this week’s Live Q&A Chat. Join me in the chat room anytime or email your questions anytime. I’m always happy to hear from you dear Trading With Cody subscribers.

Q. I work for a $40B global corporation with a stellar track record with Wall Street for hitting commitments and profitability and we are really battening down the hatches in preparation of a general economic slow down…no merit raises/watch expenses/forecast conservatively…etc. Are you hearing the same and do you think it’s already baked into the current valuations?

A. I think your company is probably one of the first to start battening down the hatches in preparation of a general economic slow down, but I do think it’s likely a rising trend, especially for any company related to commodities and/or energy. What industry is the company you work in?

• Subscriber follow up: Diverse Aerospace/automation & sensors/mobile computing and productivity technologies.
• I wonder if you guys have some exposure to commodities/energy and that’s got your whole company on clamp down? Or maybe China’s hurting you guys? Can you give us some color as to why you think your company is battening down the hatches in preparation for an economic slow down?
• It came down as an edict from our CEO. Very specifically and without any need to interpret a) we expect a flattening in the global economy, b) watch expenses and c) forecast conservatively (error on the light side). Then, we cancelled or significantly scaled back sales conferences and cut merit raises as among the things I can see and I’m sure other things I can not see.
• Thanks for sharing! The pendulum swings, as always. 🙂

Q. How is market cap  calculated when the company does business and has earnings in only one country whereas its shares are traded in many countries? Like, for eg, $BABA earnings and sales are mostly in China. It does not have a major hold in US yet. Does market cap include total outstanding shares in all countries multiplied by corresponding share prices ?

A. Basically, yes: “Does market cap include total outstanding shares in all countries multiplied by corresponding share prices ?” Let’s have @TraderLGR who has been studying market caps in college elaborate on this answer for us too. Liam, can you use $BABA in your answer, thanks!

Q. I had a market cap question, but couldn’t really formulate it the way I wanted. Basically, does market cap present a constraint on the stock price? And, what should revenue be relative to market cap? Does a stock like $FB have less probability to double and be around Google’s market cap due to revenue/market cap restraints?

A. Revenue for a small margin business, slow growth business such as tech equipment reseller can be 10x bigger than the company’s market cap. A high growth, high margin business can have a market cap that is 100x bigger than revenues. $FB‘s only limit to its market cap potential is how much money they can earn and how much money the market thinks it can earn in future years. Did I answer your question?

• Subscriber follow-up: More or less. Basically theres no exact science. It’s more of a expectations of growth. Just looking at company like $EXPE with 6 billion a year in revenues and a 15 billion dollar cap vs $FB with, I think 13 billion in revenues and a 220 million cap.
• You got this part right for sure: “Basically theres no exact science”

Cody comment: There’s been a pattern this week that beaten down companies reporting earnings have typically popped higher on good news and $FEYE $RAX and others have even gone higher after disappointing guidance and initially seeing their stocks sell-off 10% plus only to rise above by the end of the trading day. A sign that the shorts had pushed it too far, at least for the near-term.

Q. Funny, when you first broached the “pattern this week,” I wondered to which companies I might apply that strategy. You followed up with the $SNPS, $BRCD and $NTAP possibilities. Can I ask you to go beyond that? Feet to fire, which would you consider the strongest of the three — based on level of shorting, your sense of fundamentals, etc.

A. I’d bet a little bit on all three so hopefully you get 2 out of the 3 and the trades would make money. High risk kind of gamble tho!

Q. OK, here’s the deal. WE take a shot on all three ($SNPS, $BRCD and $NTAP) and YOU pledge to track them and advise us whether, if we luck out (or not), whether to hold or make these longer-term buys. (Even though they won’t officially be part of your portfolio.) OK? Or, do you see these as short-term however they go?

A. I was just pointing out that there’s a patten of beaten down tech stocks bouncing after their earnings reports, even if they miss. So any trades on those three names would just be short-term earnings reports gambles. I’ve got too much on my plate at this moment and am not in a risk-taking kind of mood at the moment, so I’m just pointing the set up out for you guys.

• Follow up comment: Got it. But I hope you’ll have a what-to-do comment on each of them (i.e., exactly HOW short-term to treat them) after the ER and tomorrow’s action. Do-able?
• Sure!

Q. Good morning, Cody. When selling options to close, how do you normally price them? I am guessing you do not sell at market, but at a limit. What is the best way to approach setting the limit price in relation to the bid and ask on a day like this?

A. I don’t have a set way for selling my options. I do try to gently let them go and use some limit prices, close to the bid and then I might walk them offer price down til they get filled.

Q. This may be a strange question, in fact it is. I trade a lot of options both selling and buying. I have traded both $GOOG and $GOOGL options. My question has to do with naked puts as I use them for short term gains after a stock has taken a good pullback and I think it will once again head higher. However, in selling puts you better want the stock in case it gets put to you which has happened a couple of times, but not very often. My question is this. If I were to get Alphabet put to me at some point is it better to own the voting shares in case I want to hold it long term or does it really matter?

A. I don’t think it matters much to long-term shareholders and even less to short-term options traders: “If I were to get Alphabet put to me at some point is it better to own the voting shares in case I want to hold it long term or does it really matter?”

Q. HPQ, yes sleepy old Hewlett Packard. The market cap is $17.3bn yet they have $17.4bn in Cash and Equivalents. Also, they are profitable, earning $4.5bn in net income as of 10/31/15. They pay a 5% dividend. Now I know this is not a growth story, but it seems like you get Hewlett’s business for free and get paid 5%. Seems like a low risk hold. People will still buy printers and laptops, etc. Thoughts?

A. $HPQ has a lot of cash on the balance sheet, but they’ve got even more debt: Long Term Debt 21,780,000. The 5% dividend is nice, as is the net income, but I don’t trust their accounting, as they do a lot of games like $IBM does. $HPQ does have another $9 BB in long-term investments (think Treasuries). That means 1/3 of their market cap is actually in net cash. I still don’t like their accounting though, but I’ll take a fresh look given that large of a cash+long-term investments profile.

Q. TWTR, what do your tea leaves say about its future? Can it become more then a niche social network company. Do you have faith in Dorsey?

A. I’m losing faith in Dorsey. I think Twitter needs Scutify and more to the point, it needs new apps/platforms that help filter and streamline their tweets. Headlne, for example, is also something Twitter was trying to do with their Moments section, but I think @KheangLy and I have created something that’s beating Twitter at its own game for now. That shouldn’t be the case — Headlne and Scutify sure aren’t trying to compete with Zuckerberg and Facebook! 🙂

Q. Thoughts on $AAPL and our March calls? I have $105’s, which are very red.

A. Apple’s got to run another 5-10% for those call options to kick in. Could happen, but not the greatest bet in the world right now either.

• Q. Can you amplify on the question/your answer on AAPL calls? If they’re down 80%+ now, considering what you said, is it time to get out rather than hope it catches up? Would seem so?And please answer with the perspective of someone for whom AAPL isn’t as large a % of holdings as it is for you. Thanks.
• Maybe take half off the table if the $AAPL call options and the potential they expire worth in a few weeks is worrying you. I am holding mine steady for now and riding the much bigger AAPL common stock position I have long held anyway.

Q. Any good shorts? $AMZN puts? Downside hedges?

A. I’m going to add a couple more shorts and/or nibble some puts in the next day or two, I expect.

Okay folks, that’s a wrap, thanks!