Oftentimes when I have gotten cute with a stock recommendation it has been rooted in something seen in a small or mid-cap company that either makes me excited or concerned for a large-cap.  For the aforementioned cute moment, I used animal hospital operator VCA Antech (stock symbol: WOOF), which posted a dog of a quarter, to predict the potential for disappointment in the earnings from pet retailer PetSmart (stock symbol: PSMT).  Now, PetSmart had been performing just fine and dandy, posting respectable profit margin expansion in the first quarter, an impressive earnings beat compared to the uber important Wall Street consensus, and a full year earnings guidance lift that signaled even brighter days ahead.  Here are the dots that I connected (pay
careful attention to how this done):

The
Only Things I Cared About in WOOF’s Financials

• The
  drop in the sales growth rate from the prior quarter was mostly a function
  of slower volumes.
• Read: Although not the cheapest animal
  hospital operator in the space, fewer visits by pet owners signaled a
  financial inability to address pet needs; and (2) fewer people are owning
  pets as a result of financial considerations.
• Management
  blamed the lackluster sales growth on a “systemic issue.”
• Read: Eh, partially an excuse for a
  lousy quarter but enough of a bold statement to get me wondering further
  on the underlying dynamics in the overall pet industry (which includes
  pet product retailers).
• Sales
  were weak in April, May, and June.
• 60%-65%
  of the store base had negative same-store sales volume growth.
• Read: Widespread nature of the
  pressured sales supports the systemic problem statement.

Luckily for me the stock ended up doing what I imagined (went down) after doing the opposite of what I imagined (went up).
Nevertheless, the making money in stocks lesson today is to always have one eye on the financial performance of the company you own, and another eye towards other opportunities in the same sector/elsewhere.  Chances are if Foot Locker is selling tons of
shoes, Nike is benefiting.  If more people are buying homes, they need kitchen utensils from Bed Bath & Beyond and perhaps, a set of tools from Home Depot.

I will leave you with this quote: “Investing is a daily SAT test, for adults.”

The Federal Reserve is perhaps the most powerful entity on planet Earth.  Yes, for real.   Unfortunately, I would bet one of my nine lives that you have no idea what the Federal Reserve is, what they do, and why to care.  It’s all good, been there before.  But, I don’t want to be horrifically boring and offer up Wikipedia points.  Instead, below is a list of how investors both big and small chat about the Federal Reserve.  If you can grasp these basic concepts, understanding the process of investing becomes significantly easier, trust me.

Any questions get at me on Twitter @BrianSozzi.  The fun part of “decoding” the Federal Reserve is that you could actually make money from the basic understanding of the institution, including its current policies.  For example, stocks of publicly traded homebuilders have been on fire this year…thanks to the Federal Reserve’s very low interest rates that have sent people into the market for owning a home.

Hawk: What do hawks do?  They circle their prey and then attack.  Federal Reserve “hawks” are members of the club that lean towards higher interest rates after circling any number of economic data points.  At present, there are not many hawks within the Federal Reserve, just a bunch of folks following the leader in Chairman Ben Bernanke (who loves low interest rates).

Dove:  Don’t these birds just look cuddly and cute?  Same goes for Federal Reserve “doves”, or those members that favor low interest rates in order to stimulate the economy.

Fed Funds rate: Sexy way of saying “interest rate controlled by the Federal Reserve.”

Summary of Economic Projections (sound smart: SEP):  Numbers compiled behind the scenes that reflect members trying to predict the future of the economy and inflation.

Size of the Fed’s balance sheet: Like a small business, the Federal Reserve (aka: the Fed) has a balance sheet.  Unlike most small businesses, the Fed’s balance sheet holds all sorts of assets (mortgages, government debt) and trillions of dollars’ worth.

Quantitative easing: The financial buzzword of 2011.  Navigate the coffee station at work by uttering: “QE is the Fed’s maneuver to buy debt and help the economy along.”

Tightening of policy: Act of taking interesting rates higher or stopping that QE thing.

Market confusion: What unfolds when investors and traders are divided about the Fed’s future intent; its confusing language does not help this at all.

Unchartered waters:  Gosh I hate this term.  Nevertheless, in terms of the Fed, means that it has never before done something like hold a press conference or release detailed economic projections.

FOMC: The Fed and its voting members.

Fed’s dual mandate: The Fed is the top dog in making sure inflation doesn’t run rampant and people are not hanging out on the unemployment rolls for a while.

Apologize for the stereotyping, but I am going to make two different assumptions on your finances.  First, the personal balance
sheet has a ton more liabilities then assets, so investing in bonds, stocks, or anything else is the furthermost thought in the mind.  Cash in hand today is of greater interest as opposed to something that, or may not, earn you money in five years, right?  Second, if you are one of the lucky with limited college expenses (during school and after graduation), and have an interest in investing, there is no doubt a feeling of being overwhelmed and confused by the entire process.

Scared money don’t make no money though, guys and gals.  I get it, been down that road before.  What happens to you lucky few is that because of that helpless feeling, the asset pile begins to be wasted on frivolous items that provide short-term gratification but lead to a slow weakening in financial health post college.

Since I have a burning passion to help the masses invest by utilizing easy to grasp lessons plus entertainment, what I have coined “investainment”, here is the college kid’s rules of the road for investing in stocks. Bottom line is that if you have no money today to invest in stocks, then don’t, just memorize these #newbie tips for when you do have the loot.  If you are a member of the aforementioned lucky and want to invest in stocks today, keep it simple and engaging.  Make that early investment a part of everyday life.  For instance, if you buy stock in Starbucks, while in the store, watch the crowds, new products, and customer service and think how it’s impacting your investment…in real-time.  Stock are living and breathing organisms not because they are traded daily by human hotshots and humming machines, but due to the fact the underlying company is an organism doing battle daily in global markets for goods and services.

Rules of the Road: First Steps to Investing

#1: Select three companies that interest you.

#2: Open up www.sec.gov in a browser, type in the company’s name, then select “10-k” (annual report for company).  Open up another browser, follow the same procedure, but open up the most recent “10-q” (quarterly report for company).  Do nothing after these steps.

#3: Seek out attributes of winning companies.  A couple that I use: (1) new products/services/stores; (2) new products/services/stores + increased operating profits; and (3) new products/services/stores + increased operating profits + increased amounts of “cash and equivalents”

#4: Read the first 10-15 pages of the 10-k, which should include how the company has done financially in the past five years.  Forget the rest of the stuff, the goal is to not get overwhelmed or discouraged by complicated topics.  This initial read should help to formulate a mental image on the performance of the company.  Then, take the knowledge learned from the 10-k and read the 10-q to see if the business is still performing as well as it did earlier in the year and in years past. Oh, and then send me an email at newsletter@decodingwallst.comto let me know how you ended up!

P.S. If you are near a TV today at 3:20 pm EST and have access to the Fox Business Network, I will be on talking about stocks and the markets.  Any questions on the segment that you have please feel free to reach out to me on Twitter(https://twitter.com/BrianSozzi), and be sure to include @FoxBusiness

While a good portion of the United States is focused on Hurricane Sandy bringing havoc to the East Coast, I wanted to share a secret on the stock market.  You, of course, could share this with your parents as they probably have a ton of money locked up in stocks, bonds, 401ks, or ETFs.  In order to make money in the stock market, first and foremost, one has to understand what those in the stock market are talking about!  Those in this highly visible club called Wall Street talk in another language, a language designed to keep the masses asking questions (have to earn those fees, baby) and never full “getting” the investments in their portfolios.  Figure it this way, how could you build a fence if never learning the correct way to use a tape measure?  Exactly the point here.  Oh yeah, in order to read most financial newspapers (which you should be reading!) there has to be knowledge on the concepts and words NOT taught in Finance 101. 

Mixed in with weekly real deal career tips, I would like to provide concepts and words that appear in my world on a daily basis.  These concepts and words are important in establishing a foundation of knowledge in investing as without them, you are indeed flying blind into a warzone spewing bullets.

Once again, this is not a one-direction street, so please reach out to me on Twitter @BrianSozzi with any finance words or concepts that make NO sense to you.  The hashtag for this dialogue would be #HelpMeInvest

To “play an event”: A very trader-ee type of comment.  Stock traders like to make a quick buck by following the market closely, or tick by tick as the lingo goes.  To “play an event” is a trader seeking to profit by making a bet on how a group of investors, aka the market, perceives an economic or political development.

Supply side reforms:  There are three rules of thumb to remember when stumbling upon a discussion of supply side economics.  Hit these talking points at the boss’ backyard BBQ and you will be a step closer to a promotion or a quick read through the Financial Times: (1) lower income taxes; (2) lower capital gains taxes; and (3) lower government regulation.  The mission of these three talking points in supply side economics is to allow businesses to flourish. 

Market sentiment: Hard to determine factor for those not actively involved in the stock market on a day to day basis.  Market sentiment is how investors feel about stocks.  A simple way to take the temperature on this is to observe how stocks finished the trading day over a period of time.  For example, stocks being higher in five of six sessions to start the year is evidence of “bullish” market sentiment.

Normalized:  Ever see this term in college?  I didn’t think so.  Normalized really does mean normal, in that it’s breaking down a financial data point excluding un-recurring items.  For example, if company XYX reports earnings per share of $0.55 in a quarter, but has a $0.05 profit from the sale of a building to the Chinese, the normalized (sound sexy: “smoothed”) number would be $0.50 per share.

P.S. Eat up all these words of wisdom now as we are in the process of re-launching our website to include all sorts of fun, super cool stuff.  The “Word of the Day” will be but a distant memory.